Tim Hortons, Burger King deal: Winners and losers

Most marriages of convenience are usually a bit less obvious than this one seems to be.

After Burger King Worldwide and Tim Hortons Inc. yesterday confirmed they are in merger talks that would create a new Canadian-based holding company, investors sent shares in both companies soaring, with Tims stock soaring 21.6 per cent to $14.85 in early afternoon trade and Burger King up 20.5 per cent to $32.67.

The deal, if it proceeds, would see 3G Capital, the Brazilian-based private equity firm that owns Burger King, own the majority of shares in the new company, with Tim Hortons and Burger King shareholders owning the rest. While a merger might tick the right boxes for shareholders looking for greater efficiencies and scale in an increasingly competitive global restaurant market, it doesn’t add anything we haven’t already seen before.

“Apart from a few obvious synergies in terms of buying and logistics, this is a tax play pure and simple – not a shareholder or customer value proposition,” says Doug Stephens, retail expert, speaker and author of The Retail Revival. “Strategically, I see this as a bad marriage for Tim Hortons.”

Inversion controversy

That tax play is already attracting attention from U.S. President Barack Obama, who says the growing trend of “inversion” deals, where American companies buy foreign companies, then move their head offices outside the U.S. to dodge comparatively higher corporate tax rates, is troubling. Reuters reports nine such deals have been struck this year alone, which puts the U.S. on a record annual pace. As companies like Chiquita Brands International run for the border, Obama calls the practice unpatriotic.

“Even as corporate profits are higher than ever, there’s a small but growing group of big corporations that are fleeing the country to get out of paying taxes,” he said. “They’re technically renouncing their U.S. citizenship, they’re declaring their base someplace else even though most of their operations are here. You know some people are calling these companies ‘corporate deserters.’”

The free ride could end soon if a House Democrat-sponsored bill to rein in inversions is passed. Obama has expressed his support for the legislation, which would force companies to be U.S.-domiciled if over half of their revenues are generated stateside.

Been there, done that

Beyond the political armwrestling, Darren Tristano, Executive Vice President of Technomic, a food industry research firm, says the Canadian icon’s onetime hookup with Wendy’s still casts a shadow over both companies. The Wendy’s Company acquired Tim Hortons in 1995, but the partnership unravelled in 2006 and Tim Hortons was subsequently spun off into a public company.

“Tim Horton’s may be the loser because of their history with Wendy’s, Canadian consumer perspective on being owned by an American brand and less focused effort on growth and performance on Tim’s because Burger King needs more effort to continue their financial improvement,” Tristano said. “There is no indication that the second times a charm for Tim’s.”

Left in the lurch are the remaining Tim Hortons locations that are co-located with Wendy’s outlets. The fate of these legacies of the ill-starred Wendy’s years is unclear in the event of a Burger King merger, and Tim Hortons declined a Yahoo Canada Finance request for comment.

Not all opposed

Checkered corporate history aside, analyst opinion is hardly unanimous. Calling it a “merger of equals,” Andy Brennan, a senior analyst specializing in the food services industry with IBISWorld, says each company has something the other wants.

“Burger King is really struggling in the breakfast segment and this is one of the main advantages to the deal to them,” he said. “McDonald’s is coming into a league of its own, and Taco Bell has recently tried to push into breakfast as well. Burger King could really use a boost in that area, and Tim Hortons is strong in the breakfast segment.”

The benefits cut both ways, Brennan adds, with Tims gaining access to the burger chain’s global development resources as it accelerates its menu expansion beyond coffee and donuts. Stephens, however, doesn’t think Burger King brings enough to the table.

“I think Tim Hortons has seen the need for the brand to move to healthier menu options and more pleasant store environments, catering to a somewhat more health conscious, upscale consumer,” he said. “I don't think Burger King offers anything that supports that strategic direction.”

Canadian branding at risk

Stephens says Tim Hortons has the most to lose given its centrally Canadian brand image.

“If anything, one of Tim Horton's great strategic trump cards is its inherent nationalism,” Stephens said. “Jeopardizing that for this transaction could be a serious mistake.”

If a deal is reached, the resulting 18,000-location, US$22 billion giant would be the world’s third-largest quick-service restaurant operation. But beyond the numbers, the future of a Canadian icon hangs in the balance, and not everyone is convinced a merger would leave a good taste in anyone’s mouth.

Carmi Levy is a London, Ont.-based independent technology analyst and journalist. The opinions expressed are his own. carmilevy@yahoo.ca