Burger King is buying Canada's Tim Hortons coffee-and-doughnuts chain in an $11.4 billion deal that has raised concerns of another US corporate icon moving abroad for tax reasons.
Burger King Worldwide denied that the deal announced on Tuesday, which would create the world's third-largest fast-food company, was being undertaken for tax reasons.
But the planned move of the headquarters of the "Home of the Whopper" from Miami to Canada, which could cut its corporate tax bill, sparked calls for boycotts from consumers and objections on Capitol Hill.
Burger King agreed to pay $11.4 billion (NZ$13.6 billion) in cash and stock for Tim Hortons, based on the closing share price on Monday.
The deal, backed by legendary investor Warren Buffett, would create a "quick-service restaurant" giant with US$23 billion in sales and more than 18,000 restaurants in 100 countries.
"By bringing together our two iconic companies under common ownership, we are creating a global QSR powerhouse," said Alex Behring, executive chairman of Burger King and managing partner of 3G Capital, Burger King's majority owner.
"This is not a tax-driven deal, this transaction is fundamentally about growth and the focus is on creating value through accelerating international expansion for both brands," Behring said in a conference call.
Burger King's effective tax rate "is currently in the mid- to high twenties, which is pretty much in line with the current effective rate in Canada," he added.
The two brands would continue to operate independently, Burger King overseen from in Miami and Tim Hortons in Oakville, Ontario.
Tim Hortons is Canada's dominant fast-food chain, operating restaurants across Canada, the US midwest and northeast, and some international locations. The tie-up would give it access to Burger King's larger footprint in 98 countries and territories worldwide.
According to the latest rankings of QSR, an industry magazine, Burger King currently ranks fifth among fast food and drink chains, behind rival McDonald's, sandwich chain Subway, coffee titan Starbucks and the Wendy's chain.
In the deal, Brazilian-controlled 3G Capital will convert its roughly 70 per cent equity stake in Burger King to a 51 per cent shareholding in the new company.
Burger King said it had lined up $12.5 billion in financing for the cash portion of the deal. That includes $3 billion from Buffett's Berkshire Hathaway for preferred shares.
Berkshire and 3G Capital partnered in the takeover of ketchup maker HJ Heinz last year.
Daniel Schwartz, Burger King's chief executive, would be the CEO of the new company, but Berkshire will not take part in the management.
Shares would be traded in New York and Toronto.
Burger King shares were down 3.5 per cent at $31.27 and US-traded shares of Tim Hortons surged 8.7 per cent to $81.04 in early-afternoon trade.
Tax inversion flashpoint
The two companies explained that their corporate headquarters will be in Canada because the country is "the largest market of the combined company."
But critics say the company will accrue significant tax savings due to Canada's lower corporate tax rate.
If true, it would be the latest in a wave of tax inversion deals in which a US company relocates its statutory headquarters outside the country to take advantage of lower tax rates.
US President Barack Obama and other top officials have strongly criticised tax inversions for weakening the country's finances. The administration is pushing Congress to amend tax laws to close the tax loophole.
Read also: Obama condemns overseas tax deals
Response to the merger announcement on Capitol Hill was swift.
"@BurgerKing wants your money. Now they want you to pay their taxes too. Time to ditch the Whopper?" tweeted Chris Van Hollen, the top Democrat on the House of Representatives Budget Committee.
Conservative House Republican Matt Salmon tweeted: "The news of Burger King's move to Canada ought to motivate us to take a serious look at how we do business."
Angry comments peppered Burger King's Facebook page.
"That's it burger king, never EVER will I buy from you. If you can't be an AMERICAN and pay taxes like the rest of us working stiffs who buy your burgers, then you're a fake and unpatriotic," wrote one commenter.
The numbers at a glance
US and Canada restaurants:
Other global restaurants:
US and Canada restaurants:
Other global restaurants:
Sources: Burger King Worldwide, Tim Hortons (2013 figures)
Buffett to get 9pc on $3b investment in Burger King deal
Warren Buffett's Berkshire Hathaway is providing $3 billion of financing for Burger King's planned takeover of Tim Hortons and will earn 9 per cent annual interest on the investment.
Berkshire is taking a preferred equity stake and won't be involved in managing the restaurant business, according to a statement today from Burger King. Buffett has previously injected capital into financial firms like Goldman Sachs and Bank of America at times of crisis, and helped fund deals such as Mars's purchase of Wm Wrigley Jr Co.
The latest transaction helps Buffett deploy some of Berkshire's mounting cash pile, which grew to a record $55.5 billion at the end of June. It also deepens his company's relationship with Jorge Paulo Lemann's 3G Capital, which controls Miami-based Burger King. Buffett teamed up with Lemann's firm last year to to take HJ Heinz private.
Read also: Buffett's Berkshire cash tops $50 billion
"3G does a magnificent job of running businesses," Buffett said in May at his company's annual meeting in Omaha.
Burger King said on Tuesday it would acquire the Oakville, Ontario-based coffee-and-doughnuts chain for about C$12.5 billion (NZ$13.6 billion) in a deal that creates the third-largest fast-food company and moves its headquarters to Canada.
Buffett has shunned bets in publicly traded bonds with yields near record lows, preferring deals in which his reputation and the size of the cash hoard allow Berkshire to lock in better rates than those available to other investors.
He has also favoured investments in food and beverage companies with well known brands. In addition to the Mars bet, in which Buffett bought $4.4 billion in bonds paying 11.45 per cent interest, Berkshire controls the largest stockholding of Coca-Cola and owns See's Candies and ice-cream chain Dairy Queen.
The 9 per cent rate on the preferred stake was disclosed today by Burger King Chief Executive Officer Daniel Schwartz on a conference call for investors. It compares with a yield of about 8 per cent on Burger King's $791 million of 9.875 per cent bonds due in October 2018, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
In the case of bankruptcy, bondholders are typically paid before preferred equity investors. Buffett didn't return a message left with an assistant seeking comment.
The Burger King deal is "a good development for Berkshire," said Tom Russo, who oversees about $9 billion including shares of Buffett's company at Gardner Russo & Gardner. 3G has a long-term approach to investing and management that works well with Berkshire's time horizons, he said.
Buffett was able to charge higher rates in the financial crisis after alternative sources of funding dried up. He got 10 per cent a year on a $5 billion preferred stake in Goldman Sachs and a $3 billion bet on General Electric. Both companies redeemed the investments at a premium. Berkshire later swapped warrants it got in those deals for common stock in GE and Goldman Sachs.
In the Heinz deal, Buffett spent more than $4 billion for common equity and took an $8 billion preferred stake paying 9 per cent interest. That transaction also gave Buffett warrants that allow him to increase Berkshire's stake in the Pittsburgh-based ketchup maker.
Buffett injected capital and confidence into Bank of America with a $5 billion investment announced in August 2011. The bank's stock plunged 58 per cent that year amid concerns that mortgage demands would force it to issue new shares.
As part of that investment, Buffett's firm received preferred stock paying 6 per cent interest and warrants to buy 700 million Bank of America shares at $7.14 apiece, which would make Berkshire the lender's biggest shareholder. At the current share price, Buffett's paper profit on those contracts tops $6 billion.
- AFP, Bloomberg