Burger King Worldwide Inc. (BKW), the second-largest U.S. burger chain, is in talks to purchase Tim Hortons Inc. (THI) and as a result, would move its headquarters from Miami to Canada. This will make Burger King the latest company seeking to relocate to a lower-tax country in a so-called ‘tax inversion’.
The merger talks sent shares of both companies soaring. Burger King is currently up about 17% trading at $31.72 per share. Tim Hortons is currently up about 19.73% trading at $75.24 per share.
Burger King and Tim Hortons confirmed their merger discussions late on Sunday. This possible deal would create a company with a market value of roughly $18 billion and the world’s third-largest fast food company. The combined business would have about $22 billion in sales and more than 18,000 restaurants in 100 countries.
The proposed deal would be structured as a tax inversion transaction to avoid higher U.S. taxes and save money on foreign earnings and cash held outside the U.S. The Canadian corporate tax rate is typically 26.5% compared with 35% in the U.S.
Recent Fiscal Quarter Results
Burger King reported mixed-second quarter results beating Zacks Consensus Estimate for EPS, but revenues missing analyst expectations. Burger King’s revenues in the last quarter was less than expected due to a difficult consumer discretionary environment in the U.S. and the sluggishly recovering economy, which continues to hurt consumers’ discretionary spending.
Tim Hortons reported strong second-quarter results and both earnings per share and revenues increased year over year. The company’s share price rose almost 8% as investors were particularly bullish on the robust comps growth in both Canada and the U.S.
Tim Hortons is Canada’s biggest coffee merchant and has about 4,500 restaurants and has been expanding its product lines to boost sales. Burger King, on the other hand, has been trying to revive growth in a very competitive U.S fast-food industry by introducing new products hoping to drive up sales.
The Rise of Inversions
Corporate Inversions or “Re-incorporating” is when a company relocates to another country to reduce the tax burden on income earned abroad. Corporate inversions are not considered tax evasion as it doesn’t involve misreprepresenting information on a tax return. Since 2012, at least 21 U.S. companies have announced or completed the deals comprising almost half of the total of 51 inversion transactions in the last 30 years.
Major Gains for 3G Capital
It is also worth noting that with its 70% stake in Burger King, 3G Capital will continue owning the majority of the shares with the remainder held by existing shareholders of Tim Hortons and Burger King.
3G Capital acquired Burger King in 2010 for about $3.3 billion and currently has a market value of $11.03 billion. The plan to move to Canada comes after Burger King’s stock-market debut in 2012, which 3G received $1.4 billion in cash from the public offering.
Is the merger justified?
Burger King alone generates about $1.04 billion in revenue (ttm) and currently has a market value of $11.32 billion with a trailing P/E (ttm, intraday) of 44.86. Tim Hortons generates about $3.07 billion in revenue (ttm) and has a market value of $10.03 billion with a trailing P/E (ttm, intraday) of 28.16.
According to these numbers the newly merged company would generate annual revenue (ttm) of $4.11 billion and have a market value of $21.35 billion. Investors should be weary of the underlying product and evaluate from an investors' stand point if the business justifies the value.
The merger between the two fast-food giants would definitely have a major impact on the fast-food industry. The main incentive for Burger King would be the lower tax rate, saving millions for the company and giving BKW a little more wiggle room to help reinvent itself.
Tim Hortons is a Canadian-bred company with strong financial history, and with this possible merger, the company may one day have a more worldwide presence. We currently have Burger King as a Zacks Rank #3 (hold) due to mixed earnings estimate revisions but leaning more toward the positive revisions. If this possible merger goes through, the lower tax rate could help to boost earnings (and if analysts revise their estimates), BKW could see a change in rank to “buy” or even “strong buy” territory.
Tim Hortons also has a Zacks Rank of #3 (hold) thanks to mixed earnings estimate revisions but also slightly leaning on the positive revision side. This possible merger will indeed be positive news for investors, but since the merger has not been finalized yet, investors should be not caught at the top of the speculation and be forced to sell for a loss after it’s all said and done.
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