Dear Americans & Canadians, It Will Be Ok

Tim Hortons on Homeland. Source: The Toronto Star
Tim Hortons on Homeland. Image credit: Marrco Chown Oved, The Toronto Star

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.

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.

Photo Credit: Mike Cassese/Newscom/RTR

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.

Overblown Reactions
To get Canada to calm down, Tim Hortons took a full page ad in the national paper to reassure Canadians.

Source: Tim Hortons ad in Globe & Mail on Wednesday, August 27, 2014.
Source: Tim Hortons ad in Globe & Mail on Wednesday, August 27, 2014.

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

Bell Aliant Bonds / BCE Offer

For those wondering, the Bell Aliant bonds will not be touched following the take over of Bell Aliant by BCE. BCE will keep the debt as is (for now).

Actually, Bell Aliant bonds should trade a little bit higher because of the better credit rating of BCE. Beyond a stronger credit rating, the financial policy at Bell (1.75–2.25x net debt/EBITDA) is more conservative than that at Bell Aliant (2.2–2.5x).

For the common shares, the voting ends on September 19 and the deal is expected to close sometime before April 2015. BCE is simply buying what it didn’t own already.

All the Bell Aliant preferred phares are exchanged for new preferred shares of BCE, with the same financial terms as the existing preferred shares.

MSG 2014 4th Quarter and Fiscal Review

MSG has delivered good Q4 results. Revenue is up 10% to $371 million vs Q4 2014, fueled by a strong playoff performance by the NY Rangers and a 62% increase in revenue for the Entertainment division. MSG Media was flat for the quarter and the year, primarily due to the Knicks absence from the NBA playoffs. Revenue for the year is up 16% and hits all-time for MSG. The results helped push MSG’s stock price to a 52-week high.

If you go down the income statement, it starts getting a little messy. Operating income needs to be adjusted for a few one-time expenses (NHL compliance buyout of Brad Richards, management change, delayed in one of their large scale theatrical show). One of the key metric, AOCF, stood at $55 million, down 40% compared to Q4 2013. However, excluding the NHL compliance buyout, AOCF would have been $84.6 million. Basically, higher operating expenses masked an increase in revenue.

The Rangers are expected to have another good season. If the Knicks can make the playoff that would push the stock further up (more advertising, ticket sales, merchandise etc…)

In a conference call with analysts, new CEO Tad Smith was reluctant to talk about details regarding the future use of free cash flow. Smith is really good at dodging questions but the one the one thing he made it clear that they want to own more content and to monetize it. It’s not a surprise, but I expect more acquisitions before dividends and share buybacks. I would prefer the latter.

Ted Smith on free cash flow:
“Since I joined the company we’ve been conducting a strategic evaluation to determine where we should focus our efforts to drive continued growth for shareholders….We believe in the importance of owning content. Our ownership of sports franchises, live entertainment productions, and original programming allows us to benefit from increases in asset value, gives us control over how to manage our brands, and creates flexibility to pursue new ways to monetize our content. In addition, we are exploring ways to extend how our customers can consume our content…”

It’s also good to note that Fiscal 2015 will be the first full year in a long time where there’s no renovation at the MSG arena and that the arena is open year-round for business.

With no debt, completed renovations, lower CAPEX the sale of Fuse, a booked Forum, a competitive NY Rangers team, the restructuration of the Knicks, it will be interesting what MSG do will all that free cash flow. MSG doesn’t issue guidance, but some analysts suggest MSG would generate between $200 million and $250 million in free cash flow in fiscal 2015.

MSG RESULTS - Q4 and Fiscal 2014

MSG RESULTS - Q4 and Fiscal 2014

Links & Sources
Q4 2014 Madison Square Garden Earnings Conference call
Conference Call Script
Q4 and FY2014 Results

Natural Grass-fed Butter in Canada

I’m shopping for grass-fed butter for two reasons.
1) The health benefits are excellent.
2) It definately tastes better.
3) And I want to make my own Bulletproof coffee.

If you are in Canada like me, shopping for natural grass-fed butter is a frustrating experience. Even the fancy hip health stores in urban centers like Montreal and Toronto doesn’t carry any. The main reason lies in our regulatory system and our seasons. Canada is subject to many strict dairy and agricultural laws, import restrictions, and we have a good winter. A snow diet is not considered grass-fed. Forget importing, Canada like other nations are very protective of their dairy industry. If there’s one thing the Bulletproof recipe has no wiggle room for, it’s the butter. It requires that you use organic unsalted grass-fed butter. Anything else other than grass-fed takes the “proof” out of bulletproof.

However, you can work your way around it. First two options are complicated and the third one is realizable.

1) Have a friend that goes to the U.S. and have brings back some. This option is not suitable for the majority of people. First, you need a friend. Second, you need a friend that goes to the U.S. Third, you need a friend that’s willing to bring butter back and that can be annoying. You might have 500 Facebook friends but where are they when you need real grass-fed butter?

2) Another hard way is to contact local dairy farms to see if they have any. Some farm produce some, but quantities can be hard to come by and it’s very seasonal. That option is one of of those hit or miss.

3) You can do what I do. Right now I’m using the L’Ancêtre butter based out of Quebec. In Canada, to have your butter qualify grass-fed, it needs to be 60% grass-fed. L’Ancêtre is at least 60% grass-fed and even more depending on the season. Now 60% is clearly not enough. However there’s a way around it. The key is to get your butter in the summer.Between May and October, cows are outside eating grass. You will notice that the butter is more yellow during that period and that’s a good sign. For the other part of the year, the winter part, the cows are fed a mix of grains depending on the farmer (and cost). That’s supposed to be other 40%. At least with L’Ancêtre, those grains are organic. My recommendation is to stock up the freezer with summer butter which is mostly grass fed. Butter freezes well and can be kept a long time.

Other notes: A lot of people swears by the popular brand name is Kerrygold. Kerrygold is classify organic and grass-fed. However Kerrygold is 90% grass-fed because Ireland has a winter too. By surfing the net, it seems that many are disappointed and feel cheated by the findings.

The Internet’s Original Sin

Ethan Zuckerman argues that it’s not too late to ditch the ad-based business model and build a better web. I hope he’s right. Most websites are ugly misleading pools of clickbait, traps, and even some of the most legit ones are covered in deception. Mr. Zuckerman was one of the guy behind some of the current ad-based model adopted by most websites (like pop-ups). His intentions were good, but it turned into an absolute mess.

Sure the majority of the content on the Net is free. The ad-based model is responsible for drowning me in information at my fingertip. However, in exchange for free content, we had to give up on quality which lead us to navigate a labyrinth of cyber landmines.

The latest trend of deception is to plug advertising as news. It look likes a real news article link, but instead it’s an advertising link that as the feel of real news. They are getting deceitful. Now bullshit radar has been upgraded and can detect 95% of the frauds. The other 5% are the new scams that keeps me on my toes.

I reposted my favorite section of the article below.

Reposted from The Atlantic
By Ethan Zuckerman

There are businesses, Cegłowski notes, that make money from advertising, like Yahoo and Gawker. But most businesses use advertising in a different way. Their revenue source is investor storytime:

Investor storytime is when someone pays you to tell them how rich they’ll get when you finally put ads on your site.

Pinterest is a site that runs on investor storytime. Most startups run on investor storytime.

Investor storytime is not exactly advertising, but it is related to advertising. Think of it as an advertising future, or perhaps the world’s most targeted ad.

Both business models involve persuasion. In one of them, you’re asking millions of listeners to hand over a little bit of money. In the other, you’re persuading one or two listeners to hand over millions of money.

The key part of investor storytime is persuading investors that your ads will be worth more than everyone else’s ads.

Full article: The Internet’s Original Sin by The Atlantic

Blackberry – Three Depressing Charts – A Reminder

In January 2007 Steve Jobs introduced the iPhone to the world. On June 29 2007, the first generation iPhone sales begins. That moment also signaled the beginning of the end for Blackberry (RIM at the time). At the time Blackberry was the king of mobile and was largely responsible making the smartphone mainstream. Its users were labeled “crackberries” because they couldn’t let the device go. Remember that flashing red light in the corner of your Blackberry phone sucking all your concentration? You couldn’t resist the impulse and you had to basically drop everything you were doing to check your Blackberry “notifications”. Back then having access to your emails on your phone was a huge thing. Well Steve Jobs changed the cool formula. Blackberry became “your parent’s smartphone” and the iPhone was the “thing”. Emails sucks and are annoying. Texting or microblogging/Twitting took over. And the Facebook notifications took over the flashing red light.

BlackBerry’s market cap, more than $80 billion at its peak, is now just $5 billion. Its peak stock price, ~$150 a share, is now trading at ~$10 a share, good enough for a solid 93% drop. Who could have predicted that the inability to play Angry Bird on your smartphone could wipe out $75 billion in value? (By the way you can play Angry Bird on your phone now, but it was a little late.)

The charts and table below are there to remind me us to never buy in the mania, especially in the tech world. Blackberry was controlling the smartphone market, and to its credit it was an excellent phone. The point is not whether or not Blackberry was a good company. The point is to make sure you understand the difference between value and price. Also be careful of bubbles because you can’t time when they will explode.

I never switched to an Android or Apple phone. I recently swapped my old beat up classic Blackberry Curve for a new Blackberry Q5. The keyboard is fantastic and the phone is a charm. My friends all have the cool hype phone. They love it at first but then they see me with by Q5 and are very curious by it. Some they didn’t Blackberry was still making phones, others are intrigue by the idea of going back to a Blackberry.

Disclosure: I never owned shares of Blackberry. I never short them either.

photo (2)
Image Source: Bloomberg

Blackberry market cap
Image Source: Forbes/Ycharts

Blackberry market share 2006
Image Source: Ping Mobile