Burger King Worldwide, Inc. (BKW) announced a definitive merger agreement to buy Canadian doughnut giant Tim Hortons Inc. (THI) in a transaction valued at approximately $11 billion. Per the deal, shareholders of Tim Hortons have the option to receive either 65.50 Canadian dollars in cash and 0.8025 common shares of the new company for each share of Tim Hortons they own or 88.50 Canadian dollars in cash or 3.0879 shares of the new company for each share of Tim Hortons they own.
3G Capital – a New York-based investment firm that owns 70% of Burger King’s shares – would now own approximately 51% of the new company with the balance being held by current public shareholders of Burger King and Tim Hortons.
Burger King has secured commitments for $12.5 billion of funding for the cash portion of the transaction. As previously announced, $3 billion will be financed by Warren Buffett's investment company, Berkshire Hathaway Inc. (BRK.B) and the balance $9.5 billion debt financing package will be led by JPMorgan Chase & Co. (JPM) and Wells Fargo & Company (WFC).
Not a Tax Driven Deal - Says Burger King
The newly-formed company would have its headquarters in Canada as it represents the largest market for the new company.
Investors speculated that Burger King opted for the merger to shift its headquarters to Canada in order to save taxes. Burger King, however, claims that this is not a deal made to save tax. Burger King’s effective tax rate is currently in the mid to high 20s, which is almost consistent with the existing rates in Canada. Burger King will continue to have its headquarters in Miami and thus will pay the same federal state and local taxes as it currently does.
Shares of the new parent company will trade on the New York Stock Exchange and the Toronto Stock Exchange.
So What’s the Benefit?
Burger King is the second largest fast food hamburger chain in the world, while Tim Hortons is the largest coffee and doughnuts seller in Canada. The merger would create the third-largest fast food company in the world with a market value of roughly $18 billion. The combined business would generate about $22 billion in sales and constitute more than 18,000 restaurants in 100 countries. The two companies would however continue to operate on a standalone basis.
The merger would be beneficial for shareholders of both the companies. Besides offering revenue synergies as a result of accelerated international growth, the deal would generate costs savings as well. Given their size, both companies would have greater purchasing power, economies of scale and efficiencies in marketing and operations. Moreover, both the companies would have the opportunity to continue to expand their unique brands.
After its merger with Tim Hortons – a seller of coffee, doughnuts, and other breakfast food items, Burger King would be able to enter the grocery business by selling packaged coffee at supermarkets in North America and also reinvigorate its breakfast business. However, this would further intensify competition for fast food chains like McDonald's Corp. (MCD) and Yum! Brands, Inc. (YUM). In fact, per media reports, McDonald’s is also planning to start selling packaged coffee at supermarkets and grocery stores in the U.S. by early 2015. (Read: McDonald's (MCD) to Offer Packaged Coffee in U.S. Markets.)
Burger King currently has a Zacks Rank #3 (Hold). Investors should watch the space to see whether the current developments have an impact on the company’s Zacks Rank.
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