Why Burger King Is Really Buying Tim Hortons (It’s Not About the Taxes)


It’s been entertaining to listen as American politicians fulminate about Burger King’s (BKW) pending $11 billion acquisition of Tim Hortons (THI), the Canadian coffee chain. To hear them tell it, Burger King is spending all that money so it can spirit its Miami headquarters across the country’s northern border and escape its American tax burden. Senator Sherrod Brown (D-Ohio) went as far as to propose a boycott. “Burger King’s decision to abandon the U.S. means consumers should turn to Wendy’s Old Fashioned Hamburgers or White Castle sliders,” he said in a statement.

Burger King executives say that isn’t the case, and Whopper devotees should take them at their word. Canada’s corporate tax rate is 26.5 percent, which is considerably lower than the 40 percent rate in the U.S. But Burger King only pays an estimated 27 percent. “We don’t expect our tax rate to change materially,” Burger King Chief Executive Daniel Schwartz said in a conference call today. “This transaction is not really about taxes. It’s about growth.”

It’s easier to understand Burger King’s motivation if you know something about 3G, the Brazilian private equity firm that bought Burger King in 2010 and owns 70 percent of its shares. The people at 3G are bankers; they acquire companies and grow them through acquisitions. They did this most successfully in 2008 when InBev, controlled by the principals of 3G and a group of Belgian investors, bought Anheuser-Busch for $52 billion. AB InBev’s (BUD) Brazilian managers slashed expenses, quickly repaid the company’s debt, and then devoured Modelo, Mexico’s largest beer company, and Korea’s Oriental Brewery.

Those were deals designed to keep Wall Street happy. AB InBev’s volume growth in the U.S. has been slowing as beer drinkers abandon Budweiser and Bud Light for craft brews and imports. AB InBev needed to sustain its growth rate, and the surest way to do it was by acquisition.

Now 3G is repeating the same formula with the world’s second-largest burger chain. Schwartz, the 33-year-old wunderkind CEO, has slashed costs. He’s expanded overseas by getting foreign investors to open new outlets in places like China, Russia, and Brazil. But he can’t sustain the company’s growth and stock price appreciation with a single restaurant brand. He and his overseers were surely planning to purchase more fast-food chains from the start.

This deal makes sense for several reasons. Burger King doesn’t have much of a breakfast business. Tim Hortons is a coffee-and-doughnuts joint; even if Schwartz maintains the chains as two separate brands, as he says he intends to, breakfast dollars accrue to Burger King. Schwartz can probably also convince the company’s deep-pocketed overseas franchisees to add Tim Hortons to their mix of restaurant offerings, although it remains to be seen whether a Canadian coffee chain will have the same appeal as the company’s flagship. Best of all, there are undoubtedly cost-cutting opportunities at Tim Hortons. Bloomberg News reports that Tim Hortons’ profit margin was 25 percent last year, compared with 50 percent at Dunkin’ Brands.

But keep this in mind: If Burger King doesn’t do another deal, 3G’s game plan begins to fray. Burger King, along with McDonald’s (MCD) and Wendy’s (WEN), is struggling to keep its customers from decamping to newer and trendier chains like Chipotle (CMG) and Panera Bread (PNRA). It’s hard to say whether Schwartz and his team will be able to buck that macro trend. Surely they would have been happy to buy an American company, and they may do that next. But Tim Hortons was for sale now. That was a lot more important to 3G than where it’s located.



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