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Warren Buffett Will Earn A Whopping 9% Per Year On His Burger King Investment

Warren Buffett
Warren Buffett

Reuters/Jason Reed

Berkshire Hathaway's Warren Buffett.

Warren Buffett's Berkshire Hathaway is providing $3 billion worth of preferred equity financing for Burger King's merger with Tim Hortons. Buffett's return on that cash will be 9%.

On a conference call regarding the merger, Burger King CEO Daniel Schwartz said the preferred equity portion of the deal's financing, which is what Buffett is providing, would carry a 9% coupon.

Preferred equity, also called preferred stock or just "preferreds," earns interest at a higher rate than bonds, but it also carries slightly more risk. If a company defaults, preferred equity investors are "junior" to all bondholders. Basically, they (most likely) get paid back second-to-last (after all bondholders, before common equity holders) if the company defaults.

So if Burger King doesn't go out of business, it looks like a pretty good deal for Buffett. Except some of the optics of the deal aren't great.

Tax Inversion?

Burger King's deal to acquire Tim Hortons is also a "tax inversion," or a deal in which a company based in the U.S. acquires a foreign company and moves its tax base.

The combined Burger King-Tim Hortons entity will be based in Canada, though both companies will maintain their physical headquarters in Miami and Oakville, Ontario, respectively.

On Monday night, The Wall Street Journal broke the news that Buffett was involved in financing the deal, which produced some scorn and outrage on Twitter. Among other comments, t his backlash was largely related to Buffett's past commentary about taxes and tax reform, which he partly outlined in a 2012 op-ed in The New York Times called " A Minimum Tax for the Wealthy."

The Financial Times interviewed Buffett on Tuesday , and Buffett told the paper that the deal was not about taxes, saying that the combined company would be based in Canada because of Tim Hortons' "strong roots" north of the border. Buffett has also worked with 3G Capital — which owns 70% of Burger King — in the past, working with the firm on Buffett's 2013 buyout of H.J. Heinz.

Tax inversions have been the most controversial corporate move this summer, with Congress, as well as the White House, pledging to pass legislation to stop the glut of companies moving their tax base overseas t o enjoy lower tax rates abroad.

burger king
burger king

AP Images

But the Burger King-Tim Hortons deal doesn't really meet the same criteria. On Monday, BI's Brett LoGiurato outlined why legislation aimed at stopping tax inversions might not affect the Burger King deal.

And the move really won't save Burger King much money, anyway.

Per Burger King's latest annual report with the SEC, the company's effective tax rate in 2013 was 27.5%, barely higher than the 26.8% effective tax rate Tim Hortons reported for the year.

On a call with analysts Tuesday morning, Burger King and Tim Hortons management emphasized repeatedly that the deal was not driven by taxes.

And over at Bloomberg View, Matt Levine had a great, simple breakdown of why the "tax inversion" would not quite work for this deal. In short, Levine outlined that you can move your corporate headquarters overseas, then make and license a product from this foreign-based subsidiary to a U.S. subsidiary that sells it, which doesn't really work when you're selling burgers and coffee.

A Private Equity Company That Sells Burgers

On Tuesday's call with analysts, Burger King and Tim Hortons also had some interesting commentary about potential "synergies" between the companies after the merger.

Basically, analysts wanted to know if we would be seeing burgers in Tim Hortons coffee joints and Tim Hortons coffee in Burger King restaurants. The answer: "Absolutely not."

Frankly, management from both companies on the call were focused on emphasizing that Tim Hortons would remain a Canada-based, Canadian-run company despite Burger King moving in.

Which makes some sense, considering the enormous popularity of Tim Hortons in Canada, where Tim Hortons accounts for 26% of all fast-food restaurants, with more than 3,600 outlets nationwide.

And as BI's Hayley Peterson has written, Burger King's 33-year-old CEO Josh Schwartz is an alumnus of 3G Capital, and during his time leading Burger King he has slashed costs at the company.

Schwartz also cut the number of restaurants owned by the company to just 52 of the company's 13,667 locations. This has significantly boosted profits at Burger King, which grew net income to $233.7 million in 2013 from $117.7 million the prior year.

And a quick look at Tim Hortons annual report shows a company that has a ton of sales but could be more profitable if some costs were reduced. Burger King and its management team most likely see the same.

Tim Hortons revenue and costs
Tim Hortons revenue and costs

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