3 Pillars Of Burger King's Turnaround

August 26, 2014 1:32 PM

Burger King has made waves with its acquisition of Tim Hortons. Although the takeover is dominating headlines, it is not the only indication of Burger King’s turnaround.

Merger With Tim Hortons

Burger King confirmed the acquisition Tuesday, after a rumor of the takeover was reported by several sources. The firm will have $23 billion in annual sales spread through 18,000 locations.

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(Image from investor presentation)

Inversion is a key benefit of the merger. By putting the combined company’s headquarters in Canada, Burger King, which paid $25.8 million of tax in the second quarter alone, could see a massive tax benefit. The United States corporate tax rate is 35 percent, compared to 15 percent in Canada.

On top of tax advantages, many are speculating Burger King is interested in acquiring Tim Hortons for a better position in the breakfast market.

Although McDonald’s and Taco Bell (owned by YUM Brands) do not break down metrics from breakfast, massive investment in 2014 by both companies suggest how lucrative the segment can be. McDonald’s continues to expand its breakfast menu across the globe and recently announced it would enter grocery stores with its coffee. Taco Bell recently launched a full breakfast menu, which analysts are applauding.

Franchisees

Burger King has been expanding its business by putting restaurants in the hands of its franchisees. With experienced franchisees running its locations, Burger King is cutting down risk in exchange for slightly lower margins.

Investors will be closely watching refranchising efforts that may carry over to Tim Hortons.

“Our strategy continues to be focused on opening restaurants with attractive unit economics that deliver strong, financial returns for our franchisees and partners,” said CFO Daniel Schwartz during the company’s second quarter conference call.

Carrols is one of Burger King’s largest franchisees with 560 restaurants (~0.5 percent of all locations). The operator voiced its belief in an uptick of sales with the $18 million acquisition of 64 more restaurants last week.

Hedge Fund Support

Bill Ackman’s Pershing Square has been a long-time supporter of the fast food restaurant. Ackman took a 41 million share position in Burger King when it debuted as a publicly traded company in 2011. Shares have more than doubled since then.

Pershing Square has slightly reduced its position, but is still the largest holder with 38 million shares.

Warren Buffett’s Berkshire Hathaway has stepped into Burger King with $3 billion of financing for the acquisition of Tim Hortons. The press release confirming Berkshire’s participation said the investment house will not participate in management. An additional $9.5 billion of financing for the transaction will be led by JP Morgan and Wells Fargo.

Shares of Burger King were last trading at $31.45, up 16.5 percent over the past two days as news of the acquisition spread.

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