In what would become the world’s third-largest quick-service restaurant company — and the largest with headquarters in tax-friendly Canada — Miami-based Burger King is talking merger with Oakville, Ontario-based Tim Hortons, which has more than 3,000 outlets in Canada and more than 600 in the U.S. “specializing in always fresh coffee, baked goods and homestyle lunches.”
The Wall Street Journal’s Liz Hoffman and Dana Mattioli broke the story yesterday that a deal was in the works that “would be structured as a so-called tax inversion and move the hamburger seller’s base to Canada.” The two companies later acknowledged the talks in a joint statement.
“Within this new entity, Tim Hortons and Burger King would operate as standalone brands, while benefiting from shared corporate services, best practices and global scale and reach,” they said in the statement.
“Tim Hortons and Burger King each have strong franchisee networks and iconic brands that are loved by their respective consumers,” the statement continued. “Any transaction will be structured to preserve these relationships and deepen the connections each brand has with its guests, franchisees, employees and communities.”
As the end of last year, Burger King had 13,667 restaurants in more than 95 countries and U.S. territories with 46% located outside the U.S. and Canada, according to the company. Franchisees owned and operated all but 52 of those restaurants.
“In 1995, Wendy's acquired Tim Hortons. At the time, the fast-food company's executives were looking for growth outside of the burger market,” Hoffman and Mattioli report. “Activist hedge fund Pershing Square Capital Management, run by William Ackman, and Trian Fund Management later accumulated stakes in Wendy's and demanded that the company spin off the Canadian chain, which it did in 2006.”
Scout Capital Management LLC, with offices in New York City and Palo Alto, Calif., and Boston-based Highfields Capital Management LP “announced stakes in Tim Hortons” last year “and called for the company to curtail its U.S. expansion plans and increase its leverage to buy back more shares,” they write.
“The companies said 3G Capital, the majority owner of Burger King, will continue to own the majority of the shares in the new combined entity on a pro forma basis, with the remainder held by existing shareholders of Tim Hortons and Burger King,” report Reuters’ Soyoung Kim and Euan Rocha.
“3G, a New York-based investment firm with Brazilian roots, acquired the then-struggling Burger King in 2010 for about $3.3 billion,” they continue. “It later took the company back to market in 2012 but still owns nearly 70% of the firm's shares.”
“This deal would be notable given that the companies involved are roughly the same size [Burger King has a market capitalization of $9.6 billion; Tim Hortons, $8.4 billion], and it would suggest that the appetite for this type of tax-focused transaction may extend to other sectors,” Bogaisky suggests.
In the New York Times, Harvard economics professor N. Gregory Mankiw proposes “repealing the corporate income tax entirely,” as well as “scaling back” the personal income tax. “We can replace them with a broad-based tax on consumption,” he writes. “The consumption tax could take the form of a value-added tax, which in other countries has proved to be a remarkably efficient way to raise government revenue.”
Burger King and Tim Hortons also cautioned in their statement that “there can be no assurance that any agreement will be reached or that a transaction will be consummated” and said that they would not comment again until an agreement is reached or scuttled.
Fortune’s Dan Primack offers four “quick issues to consider” about the proposed merger, the first being “McDonald’s has got to be loving it. Just imagine all of the passive-aggressive patriotic advertising its marketing gurus would come up with.”
It can use all the help it can get.
Julie Jargon reports in the Wall Street Journal this morning that McDonald’s customers in their 20s and 30s are “defecting to fast-casual restaurants like Chipotle and Five Guys,” as the subhed puts it. Millennials are reportedly “seeking out fresher, healthier food and chains that offer customizable menu options for little more than the price of a combo meal.”
The company on Friday named Mike Andres as president of McDonald’s U.S.A., the second time in less that two years that it has replaced the head of its domestic business as it suffers its worst decline in same-store sales since 2003, Jargon reported earlier.
“A decade ago, there were 9,000 fast-casual restaurants in the U.S., versus nearly 14,000 McDonald's,” Jargon writes in today’s story. “Now, fast-casual restaurants number more than 21,000, according to Technomic, while McDonald's U.S. restaurant count has risen only slightly.”
As of this morning, at least, McDonald’s is still based in Oak Brook, Ill.