What the Tim Hortons-Burger King deal really means
Sonja Puzic, CTVNews.ca
Published Monday, August 25, 2014 2:02PM EDT
Last Updated Tuesday, August 26, 2014 2:00PM EDT
As news of a merger between Burger King and Tim Hortons is confirmed, you’re probably wondering what the deal really means for your daily double-double fix. Here is the breakdown of what could be a sweet deal for Canada’s beloved coffee chain.
How would merging with Burger King help Tim Hortons?
The deal means Tims’ coffee and products will have much wider distribution in the U.S., analysts say.
Kevin O’Leary, chairman of the O’Leary Financial Group and host of CTV2’s “Shark Tank,” said Tim Hortons has struggled to compete with popular U.S. coffee chains like Dunkin’ Donuts since it opened a limited number of stores across the border. Burger King could change all that by serving Tim Hortons coffee across America, O’Leary told CTV News Channel Monday.
On Tuesday, a joint statement from the two companies said that although they will be managed independently, each will benefit from the other’s “best practices” to increase their global presence.
Does this mean Tim Hortons will be selling burgers?
As for changes at Canadian Tim Hortons locations, don’t fret. You won’t be seeing any bizarre burger-doughnut crossovers or pop-flavoured coffee – at least for the time being.
“I don’t think we’ll see any immediate changes to Tim Hortons,” Bryan Borzykowski, an independent business journalist, told CTV News Channel.
“You’ll still be able to get your double-double, there’s no worry about that. And that for sure will not go away because that’s what people love about Tim Hortons.”
Indeed, the joint statement said the deal “will not change the way Tim Hortons works with its franchisees or its business model.”
Tim Hortons president and CEO Marc Caira said Tuesday that the company’s core market “has been, will be, will continue to be Canada.”
What is behind this deal?
Before the deal was confirmed, many analysts said that Burger King’s main goal was to reduce its corporate tax bill by moving headquarters to Canada.
Retail expert Jason Dubroy said the corporate tax rate in the U.S. is 35 per cent, “the highest tax rate from a corporate perspective anywhere in the industrial world.”
In Canada, the baseline rate is much lower at 15 per cent.
Burger King would save money in what’s known as a tax inversion, an “increasingly common manoeuvre” for U.S.-based companies, Dubroy said.
But Burger King executives denied Tuesday that this is a “tax-driven deal.”
Burger King CEO Daniel Schwartz said both companies will continue to pay taxes in their respective countries. Even though the new, post-merger company will be based in Canada, Burger King’s headquarters will remain in Miami and continue to pay U.S. federal, state and city taxes on the company’s U.S. income, Schwartz said.
Burger King chairman and managing partner at 3G Capital, Alex Behring, said the company’s current tax rate is in the mid-20 per cent range, which is in line with Canada’s corporate tax rate.
“We don’t expect there to be meaningful tax savings, nor do we expect there to be a meaningful change in our tax rate,” Schwartz said.
What exactly is tax inversion?
A tax inversion allows a U.S. company to reorganize in a country with a lower tax rate by acquiring or merging with a company there. The move allows money earned outside the U.S. to be transferred to the parent company without paying additional U.S. taxes.
U.S. President Barack Obama is not pleased with the tax inversion process, but it is perfectly legal, Dubroy said. U.S. lawmakers haven’t yet figured out whether to impose penalties on companies that seek tax breaks abroad, he added.
So there’s more to the deal than tax savings?
Although the federal corporate tax rate in Canada is “very attractive,” U.S. companies still face “the burden of provincial taxes,” especially if they relocate to Ontario, O’Leary said Monday.
The Burger King-Tim Hortons deal is also largely driven by the fact that both companies have “a significant challenge in growth,” said O’Leary, who is a Tim Hortons shareholder.
“We’re not growing,” he said. Tim Hortons stores are everywhere in Canada, and it has been difficult to add new locations, he added.
O’Leary said the deal will be mutually beneficial for both companies, which can learn from each other’s successes and failures.
With files from Andrea Janus and The Canadian Press