Burger King – Tim Horton’s Merger

Group 11 – Section BMayank Rathore, 13P148 Nikhil Jain,

13P152Shashank Shukla, 13P166 Shivam Atri, 13P167

Burger King

Global chain of hamburger

Headquartered in Miami, USA

Brazilian private-equity firm 3G Capital Inc., currently owns about 70% of Burger King.

Has been reporting unimpressive results in the past few quarters

Reported 6% revenue decline due to slump in company-operated store revenues

Tim Horton

Canada’s largest fast food service

Has 4546 system-wide restaurants

Stores spread mainly across US and Canada

Reported a 9% increase in revenue y-o-y in Q2, 2014

Same store sales growth at 2.6% in Canada and 5.9% in the USA

Wendy's International Inc. bought the chain in 1995 and held onto it until 2006, when it was spun off as a separate publicly traded company

The MergerJoined hands to create world’s 3rd largest quick service restaurant companyCombined sales of $23 billion

New company has over 18,000 restaurants in 100 countries

Headquartered in Oakville, Ontario, Canada

3G capital will own 51% in the new merged entity

Will be listed on both Toronto and New York Stock Exchange

Tax Inversion Concerns• Re-incorporating a company overseas in order to reduce the tax

burden on income earned abroad• The Canadian corporate tax rate is typically 26.5%• USA has a corporate tax rate of 40%• Burger King already pays a lower rate because it operates in a

mix of tax jurisdictions.• Its effective tax rate in 2013 was 27.5 percent• Structured to shield Burger King holders from capitalgains

taxes.• Burger King maintains that the deal is more about growth and

not really about taxes

3G Capital and Mr. Buffett• Joined hands last year in takeover of HJ Heinz Co.• Deal worth $23.3 billion• Similar structure of the deal wherein Buffett invested $8

billion for preferred shares with a return of 9% annually• Berkshire to be compensated for more than $50 million in

additional taxes• “3G does a magnificent job of running businesses” – Mr.

Buffett• Mr. Buffett assumed the new company resulting from it

would be based in the U.S

Revenue Figures

Burger King – Share price movement

Tim Hortons – share price movement

Stock Gains• Burger king shares jumped 20% the next day, the

biggest rise since its debut on NYSE• Retreated 4.3% to $31 the following day• Tim Horton climbed 19% followed by 8.1% the

following day• Transaction offers a 30% premium to Tim Horton's

shares• Tim Horton's shares traded below the deal price– Deal could be halted by Canadian government due to

tax inversion concerns

Deal Financing• Burger King to pay $11 billion to Tim Hortons• 30% premium to Tim Hortons at the time of offer• Berkshire Hathaway to pay $3 billion of it through

preferred equity financing– To receive an interest payment of 9 percent annually on

the investment

• Burger King to fund the cash portion from the debt package received from JPMC and Wells Fargo & Co. worth $9.5 billion

Advantages to Burger King• International expansion –

fits perfectly with its new business model

• Better menu resources – could use Tim Hortons innovative menu

• Incremental revenues• Expansion scope – entry

to retail stores• Tax Savings – shifting

head office to Canada

Synergies InvolvedTim Horton

• Struggled to gain foothold in the US

• Has versatile offerings for the breakfast segment

• Has double the number of restaurants as compared to McDonalds in Canada with better system wide sales

• Has over 70% share of baked goods market in Canada and more than 75% of Canadian coffee market

Burger King• Facing increased competition in the

US from emerging fast-casual and breakfast segment

• Witnessing sluggish growth in the domestic market

• Company plans to use Tim Horton’s offerings to compete with Starbucks and McDonalds McCafe and Dunkin Donuts in USA

• Has around 280 restaurants in Canada and has limited growth potential in USA with 7000 restaurants

THANK YOU