Why Burger King really bought Tim Horton’s

Tim

Photo credited to http://www.cbc.ca/news/business/tim-hortons-burger-king-deal-would-base-burger-chain-in-canada-1.2745754

Recently, news in the business community has pulled at the heartstrings of Canadians. Burger King, a burger chain headquartered from Miami, Florida with sales of USD$1.1B and 13,808 locations[1] is purchasing the much smaller Tim Hortons (C$3.12B in sales and 4,304 locations) which is based in Oakville, Ontario[2].

This won’t be the first time that an American firm has purchased Tim Hortons. In 1995, Wendy’s bought Tim Hortons with the goal that the cash generating ability of Tim Hortons and co-branded locations would put Wendy’s in a better position. In 2006, Wendy’s spun off Tim Hortons because of its own capital requirements.

In reading the media reports and watching a few interviews, it seems that the focal point of the transaction is to decrease the tax bill that Burger King will be paying. I know that the corporate income tax rate in Canada is lower than the United States, but are excise/border taxes and payroll taxes also lower in Canada?

Burger King and Tim Hortons operate on different business models. Burger King is not capital intensive while Tim Hortons, with their ownership of logistic and manufacturing facilities, requires capital for upkeep and improvements. Burger King could leverage these networks to aid in increasing their own margins.

The corporate office of Tim Hortons has, in comparison to the industry, average administrative expenses per franchise. Burger King’s administrative expense per franchise is approximately half of Tim Hortons. Burger King may attempt to leverage their corporate administrative system to help increase margins at Tim Hortons.[3]

Can you think of other reasons why you see this deal good for either side? What are your thoughts on the transaction?

I think that the Burger King/Tim Hortons merger is going to look like this:

– Burger King will close its Canadian head quarters and move duties to Tim Hortons. In the end, Canada would be down net jobs.

– Oakville, Ontario will be the world “headquarters” for the group for tax purposes but decision making will occur out of Miami, Florida.

– Burger King’s Net Debt (Debt after cash on hand) is approximately USD$2.3B. Tim Hortons’ debt has ballooned to C$1.3B while operating and investing cash flows are USD$207 and C$132M respectively. These amounts will be used to pay down debt of the new company.

– Burger King will use the Tim Hortons logistics system to help drive down cost.

– Burger King and Tim Hortons won’t try to make co-branded locations as was attempted by Wendy’s.

– Burger King has 13,000+ locations but they are owned by 50-300 franchisees (depending on who you talk to). These franchisees will be heavily pitched to purchase Tim Hortons franchises.

– Tim Hortons will focus on growing more in the US and internationally.

Please feel free to leave a comment.

Kevin

[1] http://investor.bk.com/default_en.asp?idioma=1&conta=44

[2] http://www.timhortons.com

[3] http://www.bnn.ca/shows/market-sense.aspx

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