The King is moving north.
Carlo Allegri / Reuters
Peter Jones / Reuters
It's official: Burger King and Tim Hortons are going to merge, with Warren Buffett's help.
In a deal announced Tuesday morning the two companies said that they would be forming a third company 51% owned by the private equity firm 3G Capital, run by Brazillian billionaire Jorge Paolo Lehmann. 3G currently owns about 70% of Burger King's stock. Combined, the new company will have over 18,000 locations and $23 billion in sales across them.
The company will be based in Canada but will be lead by Burger King's executive chairman Alex Behring and Burger King chief executive officer Daniel Schwartz, who will keep his Burger King job while Tim Hortons chief executive officer Marc Caira will be vice chairman of the new group in addition to his current role.
Also playing a role is Berkshire Hathaway chief Warren Buffett, who also teamed up with 3G in its takeover of Heinz early last year. Buffett will be putting up $3 billion in the deal, getting back preferred stock which will pay him a dividend. The rest of the money comes from debt financing raised JPMorgan and Wells Fargo.
The combined company, while still maintaining the separate brands, gives Burger King a slice of the higher-profit breakfast-and-profit business and Tim Hortons, which has reached saturation level in Canada, a chance to expand globally. Tim Hortons will also expect to come under the thrifty management style of 3G, which has limited the use of color copying and FedEx in some of the companies it owns as well as getting rid of cushy executive offices.
Both Burger King and Tim Hortons stock surged yesterday when the companies announced they were in talks. Burger King's shares advanced almost 20% while Hortons went up 19%. Hortons shareholders will get C$65.50 for their shares, along with .8025 shares of the new company, about C$94.05 per share total, around $86. Before news of the deal talks broke, Hortons was trading at C$68.78.
One reason why both companies stock soared — usually the target company shareholders get a boost while the acquiring company's stock flags after deal talks are announced — is more favorable taxation by basing the new company in Canada, which has lower corporate taxes than the U.S. as well as a more favorable treatment of money earned overseas. About 42% of Burger King's revenue comes from outside the U.S. and Canada.
Deals like this one, where a larger U.S. company acquires a smaller overseas one and then changes its corporate citizenship — known as inversions — are increasingly popular and have drawn criticism from Democrats in Congress as well as the President. While White House press secretary Josh Earnest declined to comment on the deal yesterday, Democratic senator Carl Levin called it and "example of why Congress can't afford to wait any longer to put a stop to tax dodging through this kind of merger."
The two companies put it differently in their statement: "The combination generates substantial value for shareholders of both companies and provides the opportunity for shareholders to participate in the new company's long-term value creation potential."
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