Full article at Seeking Alpha
By Brian Langis
More Disclosure: I wrote this at a Tim Hortons. (Or at King Hortons, Burger Tim? There’s no new corporate name at the moment)
On the surface, this looks like a funny marriage, one of those marriages where everyone is asking “how are these two together”? An iconic U.S. burger chain is in talks of swallowing the unofficial Canadian national symbol. In the media the topic is spun as a tax controversy. What seems to be at work here is the reverse snowbird effect: A Miami-based company moving north of the border to apparently save on taxes. But then I had some time to digest the news. If you look beyond the headlines, it appears Tim Hortons (NYSE:THI) and Burger King (NYSE:BKW) could use each other’s expertise. Tim Hortons could benefit from Burger King’s worldwide expertise in 100 countries, especially in the U.S., an area where Tim Hortons has been struggling expanding and Burger King could use a successful business, growth, and a good cup of coffee.
I’m amazed at how little information is provided in articles regarding the transaction. It’s overwhelming that with the tsunami of news regarding the deal, little is attributed to the elements that really matter such as free cash flow, operating metrics, and valuation among other things. The more I read the more my head is filled with useless information and noise (Protest this, boycott that, and petition this). Not surprisingly, the mainstream media is focused on the emotional aspect of the transaction. I understand when it comes down to coffee, burgers, and doughnut, consumers can get really emotional, as this article, “Hands off my Tim Hortons!” demonstrates. The media also likes throwing big numbers around to impress without explaining anything ($12 billion…that’s like so big…wooaaah). What the media should be busy explaining is “what’s $12 billion in relation to its valuation”? Good luck getting an answer. I can’t blame them for that either. Start educating your viewers and the advertisers are gone (and somebody’s job). Emotions and drama bring in ratings and clicks, not balance sheet analysis.
Since I am not here to entertain and Burger King has reassured that they won’t touch the coffee, what really matters is what does this mean for the shareholder? The focus of this article is to educate the reader and to make sense of the transaction. Because of time and information constraint, this is not a valuation report but instead information to help you orient yourself. The public has seized on the tax inversion aspect of the transaction to the exclusion of all other reasons for the acquisition, which seems bigger in this case. Burger King executives insist they are not trying to escape U.S. taxes, that it simply wants Tim Hortons. I will try to sort it all out and stick to what’s pertinent.
The following links are where you can start informing yourself. It’s where the story broke out and the official information from both parties.
- August 24,2014: The article in The Wall-Street Journal that broke the news Sunday evening: Burger King in Talks to Buy Tim Hortons in Canada Tax Deal.
- August 24, 2014: In response to the media report, the official press release by both companies: Tim Hortons and Burger King confirm talks regarding potential strategic transaction.
- August 26, 2014: Official merger announcement: World’s third largest quick service restaurant company launched with two iconic and independent brands: Tim Hortons and Burger King
- August 26, 2014: Tim Hortons and Burger King Host Media Conference Call (Transcript)
- August 26, 2014: From the SEC, companies presentation.
The Tim Hortons-Burger King Story is Interesting
There’s nothing material here except an interesting story.
Despite the sense of patriotism many Canadians may feel while drinking Tim Hortons coffee, the company has been owned by a large U.S. burger chain before. In 1995 Tim Hortons was acquired by Wendy’s for $400 million. Tim Hortons became officially “American” with its American overlord and American headquarters. But instead of a national revolt, the growth of the chain is expanded and joint stores popped up across Canada.
In 2006, Wendy’s is pressured from activist Pershing Square Capital Management, run by Bill Ackman, and Trian Fund Management, to spin off Tim Hortons as a stand-alone company. Wendy’s complies and under strong demand the IPO of price was raised from $21 to $27. However, such a popular name attracted a lot of hot money which fueled the stock to close up about 22.5 percent on its first day of trading.
In 2009, Tim Hortons, as a stand-alone company, renounced its American citizenship and once again became Canadian when it moved its headquartering to Oakville Canada because of lower corporate tax.
Summer 2014, Burger King is in talk of acquiring Tim Hortons to also take advantage of lower corporate tax and other reasons. Another familiar name is back in the mix: Bill Ackman, who is a minority shareholder of Burger King. According to The Wall-Street Journal, Ackman controls about 11 percent of Burger King through Pershing Square. 3G Capital is the majority owner of Burger King. Ironically Bill Ackman is once again a minority shareholder of a burger chain that will own Tim Hortons. Below are some lines from a letter Mr. Ackman wrote to the CEO and Chairman of Wendy’s in 2005, where he was very persuasive to get Wendy’s to spin off Tim Hortons.
Given Tim Hortons’ substantial free cash flow growth and its expected contribution of more than half of the Company’s total 2005E operating income, we believe that the most effective and immediate way to create shareholder value would be to separate Tim Hortons from the Company as a standalone publicly traded enterprise. Such a transaction would have several long-term strategic benefits. Spinning off Tim Hortons would likely boost managerial productivity for both entities by improving resource allocation and overall corporate focus. The public listing of Tim Hortons would allow each of Wendy’s and Tim Hortons’ management teams to be compensated based on the performance of the business it runs…” -
And it gets better:
Clearly, our voice is not alone. We believe that many Wendy’s shareholders and members of the Wall Street research analyst community have frequently questioned the benefits of having Tim Hortons under the same corporate structure as Wendy’s given the minimal synergies that exist between the two companies. Indeed, the majority opinion on the Street is that Wendy’s could create significant value for its shareholders by pursuing a spin-off. ” – Letter from William Ackman to the CEO and Chairman of Wendy’s on July 11, 2005. Source: SEC
One can’t help asking “Why can’t Wendy’s, but Burger King can, own Tim Hortons?” My guess is management quality.
To get Canada to calm down, Tim Hortons took a full page ad in the national paper to reassure Canadians.
Consumers and investors from both sides of the border are fuming and seem confused. Americans are enraged because Burger King is leaving the U.S.(again and again) to dodge taxes, and Canadians are angry because they think Tim Hortons is becoming American (again). Politicians are getting their sound bites in and there’s talk of boycott and such on both sides of the border.
In light of the details of the transaction, speculation and everybody with an opinion decided to fill the void. The reactions reported are exaggerated and they will eventually die down. Despite everything that’s being said, people will still buy Tim Horton’s coffee in Canadian decorated cups and life will go on as usual. In the U.S., if Americans want to play the patriotic card because Burger King is a “tax dodging company,” maybe they should also look at the company that makes their iPhone to see how much taxes they pay. Dear consumers, Tim Hortons will keep its Canadian heritage and Burger King will not have a maple syrup tap at the soda fountain stand.
In Canada, we have bigger problems, like bringing the Stanley Cup back to Canada.
Is the New Burger King-Tim Hortons Really Canadian?
It’s a good question. It seems that a lot of people are confused on the citizenship of Tim Hortons under a Burger King deal. On paper, Burger King would become Canadian, therefore Tim Hortons remains Canadian. But here’s where it gets confusing. The new entity, domiciled in Canada, will be majority owned (51%) by 3G Capital, a Brazilian global investment firm owned mostly by Brazilian billionaire Jorge Paulo Lemann who lives in Switzerland. To add to the confusion, 3G Capital is a Cayman Islands private equity fund that operates from New York.
To my understanding, Tim Hortons’ principal home is Canada but it’s owned by foreigners. I guess that would make Tim Hortons a legal immigrant in Canada.
To My Americans Friends: What’s Tim Hortons
Unless you are from the Buffalo, you might be wondering what or who is Tim Horton. Regarding the who part, Tim Horton was an NHL player. He cofounded Tim Hortons with his partner Ron Joyce. Concerning the what, it’s a Quick Service Restaurant (QSR) that’s very famous in Canada. QSR is the industry term for fast food restaurants. Canadians think Tim Hortons is a very special place and are proud of the place, and over time they have developed a very deep connection with the establishment. In Canada, Tim Hortons is a cultural mega icon. It’s up there with hockey and maple syrup. Marc Caira, CEO of Tim Hortons, illustrates that special relationship with the best line during the conference call: “The Timbits have become as much as symbol of Canada as the Beaver or the Mountie.”
Why is it so special? It might be shocking to a new comer that the place that’s so ordinary has a cult like following. I’m a frequent consumer and after all Tim Hortons is just your average cup of coffee and the food is ordinary. Even with superior coffee and bigger donuts somewhere else, Tim Hortons is too engraved in our DNA to look anywhere else, which explains its 77% control of the Canadian brewed coffee market. So how do you explain to an American, or an outside investor, why Canadians are so patriotically loyal to Tim Hortons?
The best way to answer that question to an American is with a question: Why are the Dallas Cowboys “America’s Team“? Why is America so fascinated with a team that hasn’t seen success in twenty years? There are 31 other teams that you could cheer for. Nobody can tell me why, it just is.
This is not a scientific response made in a controlled environment. It’s certainly not the best analogy since Tim Hortons is very successful and the Cowboys are not. The point I’m trying to make is it’s extremely difficult to convert somebody. Once you captured the heart and mind of a person, which Tim Hortons did, it’s an intangible that you can’t measure. To stretch my point, if I start a new better religion tomorrow, it won’t convert people.
However the American customer does not care about the Canadian emotional aura surrounding Tim Hortons. In the U.S. Tim Hortons is just another regular coffee chain trying to gain market share. The question Tim Hortons needs to answer is why the American should go to Tim Hortons instead of Dunkin Donuts? It will take more than a love story. Since loyalty isn’t the American customer’s strong suit, Tim Hortons needs to offer the best deal, the highest value, and an excellent pleasant experience to grab their attention.
What We Know
FOR THE FULL ARTICLE: Dear Americans & Canadians, It Will Be Ok