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Burger King Acquires Tim Hortons for $11.4 Billion

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Burger King Worldwide agreed on Tuesday to buy the Canadian restaurant Tim Hortons for about $11.4 billion creating one of the biggest fast-food chains in the world.

Today, Burger King and Tim Hortons shares are up .80% and 8.82%, respectively, on the positive news.  Over the past week, Tim Horton’s stock has returned 31.40% and Burger King has returned about 22.5%.

As originally planned, Burger King will move its headquarters to Canada and will be saving millions of dollars thanks to the lower corporate tax rate in Canada.  This will only elevate the debate over tax inversions that President Obama has been trying to prohibit as of late.

The American corporate tax rate is approximately 35% while Canada’s is about 15% (though Ontario has a provincial corporate tax of 11.5%).  According to the company’s recent 10-Q,  Burger King paid a tax rate of roughly 27% and would shave off a couple percentage points by moving to Canada.

The Acquisition Terms

Under the terms of the deal, Burger King will pay 65.50 Canadian dollars in cash and 0.8025 of one of its shares for each Tim Hortons share, which is about $94.05 dollars a share.  As an alternative, shareholders will be able to choose to receive either C$88.50 in cash or 3.0879 shares of the new company.

Helping with the transaction, legendary investor Warren Buffett’s Berkshire Hathaway Inc. (BRK.B - Free Report) is providing $3 billion in preferred equity financing.  The majority stake shareholder, 3G Capital with its original 70% equity interest in Burger King, will decrease its equity interest to 51% in the combined companies.  Berkshire Hathaway, which previously joined with 3G to buy H.J. Heinz & Co. in 2013, won't be involved in the management or operation of the business.

"By bringing together our two iconic companies under common ownership, we are creating a global [quick service restaurant] powerhouse," said Alex Behring, executive chairman of Burger King and managing partner of 3G Capital.

Burger King has also obtained commitments for $12.5 billion of financing for the cash portion, including commitments for a $9.5 billion debt financing package led by J.P. Morgan (JPM) and Wells Fargo (WFC).

Benefits of the Merger

This deal makes sense for both companies in terms of trying to access international markets.  Tim Hortons is the iconic coffee-maker in Canada, but is barely present in the United States. In the perspective of Burger King, the company can now utilize the resources that Tim Hortons will offer ranging from its coffee products to lunch specials, etc. in addition to the cheaper tax rate.

The merger of both firms will be able to position the new company in a very good way to rival the giants of McDonalds (MCD - Free Report) and Yum! Brands (YUM - Free Report) .  This deal will create the world's third largest quick-service restaurant company, with about $23 billion in system sales and more than 18,000 restaurants in 100 countries.

The two companies emphasized that each will continue to run as separate restaurants and continue to be run from their current home bases.  This allows the companies to keep their respective “names” that they have tried so hard to build.

“Our combined size, international footprint and industry-leading growth trajectory will deliver superb value and opportunity for both Burger King and Tim Hortons shareholders, our dedicated employees, strong franchisees, and partners,” Mr. Behring said in a statement. “We have great respect for the Tim Hortons team and look forward to working together to realize the full potential of these two extraordinary businesses.”

Bottom Line

The new combined forces of Burger King and Tim Hortons will be a significant force to be reckoned with in the fast-food industry. Although they have now combined forces, the question that investors should be asking is what will they be doing different to steer ahead of the pack in the fast-food industry. 

We currently have Burger King as a Zacks Rank #3 (hold) due to recent earnings estimate revisions.  But, with the newly announced news and the potential for lower taxes, investors should be watching closely to see how the recent moves impact the Zacks Rank. 

Meanwhile, we currently have Tim Hortons as a Zacks Rank #3 (hold) due to a 50/50 split among analysts in their earnings estimate revisions.  It is also important to note that the retail restaurants industry is currently in the bottom 30% of all industries, so regardless of the tax rate, the joint THI/BKW company will still have to fight for share in this ultra-competitive market.

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