Tim Hortons and Burger King are confirming they’re in talks to create a new, Canadian-based company that would rank as the third-largest quick-service restaurant chain.
The companies issued a joint statement late Sunday, emphasizing that they are still negotiating, and there is no assurance that "any agreement will be reached or that a transaction will be consummated." But they stressed that if the deal goes through, the two chains would continue to operate as “standalone brands.”
The statement, released after the Wall Street Journal reported that the two companies were in talks, said that a key driver of the takeover discussions is the potential for Tim Hortons "to leverage Burger King's worldwide footprint and experience in global development" and accelerate its growth in international markets.
Berkshire Hathaway chairman and CEO Warren Buffett is also reportedly involved the deal. The Wall Street Journal reports Buffett would supply 25 per cent of the Tim Hortons purchase price as part of his partnership with Burger King. His full role in the deal remains unclear.
The Wall Street Journal also noted it wouldn’t be the first time Berkshire Hathaway had been involved with Burger King’s controlling shareholder, 3G Capital Management. Buffet partnered with the investment firm in 2013 to take over H.J. Heinz and Co. for $23 billion. In that deal, Buffet’s company contributed about half the total value.
Even without Buffet’s involvement, shareholder response to the potential deal was positive. Stocks of both companies surged Monday, with both companies seeing an almost 20 per cent jump in share prices.
Observers have noted that for Miami-based Burger King, the real appeal of a takeover may be the opportunity for it to take advantage of Canada's corporate tax rates, which are significantly lower than those of the U.S.
The U.S. corporate tax rate is around 35 per cent. In Canada, the federal rate is 15 per cent and Ontario’s rate is 11.5 per cent, for a total corporate tax rate of 26.5 per cent.
Over the last few years, 60 U.S. companies have moved their headquarters elsewhere in order to pay less tax, McMaster University business professor Marvin Ryder told CTV News Channel Monday.
The so-called “tax inversion” has become a popular corporate move in recent years, drawing the ire of several political leaders in the U.S., including U.S. Treasury Secretary Jack Lew.
U.S. President Barack Obama has even gone so far as to suggest that corporations that engage in such tax-evading manoeuvres are essentially "corporate deserters who renounce their citizenship to shield profits.”
Canada’s Industry Minister James Moore would not comment specifically on the Tim Hortons deal, but his office highlighted Canada’s low tax rate.
“Our government has reduced Canada's tax rate on new business investment making it the lowest in the G-7,” a spokesperson said in a statement. “According to KPMG, Canada’s total business tax costs are now 46 per cent lower than those in the United States.”
For Tim Hortons, which has long-struggled to find success in the U.S., this isn't the first time the coffee and doughnut giant has made deals with a U.S.-based chain. In 1995, Tim Hortons was purchased by Wendy's International Inc. allowing it to share locations with the burger giant.
That deal came to an end in 2005, when Tim Hortons began expanding its menu to include sandwiches and more, compelling Wendy's to spin off Tim Hortons into its own publicly-traded company.
A deal with Burger King could help Tim Hortons expand into the U.S., something the coffee chain has had limited success with so far, said Ryder.
“The only place where they can grow is in the United States,” he said. “Having a big brother like Burger King to help open the doors and let them in – that would be very helpful to them.”
Shares in Tim Hortons have been trading higher in recent weeks, after the company reported better-than-expected financial results and announced plans to offer new menu items to boost breakfast and lunch sales. The company’s shares jumped even higher following news of a potential merger with Burger King.
Because the merger is not a done deal, Ryder said other companies may start wooing Tim Hortons in hopes of reaching a similar agreement.
“We could well see some sort of a battle, if you will, for control of the company going forward.”
Tim Hortons currently operates more than 4,500 restaurants, including 3,630 in Canada and 866 in the United States.
