Share price of Burger King Worldwide, Inc. (BKW) hit a 52-week high of $33.97 on Aug 25 after it confirmed that it is looking to buy Canadian donut giant Tim Hortons Inc. (THI). Per the deal, headquarters of Burger King would possibly move to Canada to lower its tax burden. Investor confidence in the deal was reflected by a 20% surge in the leading fast food chain’s share price on Aug 25. Tim Hortons also hit a 52-week high as its shares rose 19% on the same day.
The share price also got a lift from media reports that stated that Warren Buffett's investment company, Berkshire Hathaway Inc. (BRK.B), would reportedly finance the deal. Buffett is expected to invest 25% or $3 billion in the form of preferred shares. However, the exact structure of Buffett’s contribution has not been disclosed.
This potential deal would create a company with a market value of roughly $18 billion and the world’s third-largest fast food company. The combined business would have about $22 billion in sales and more than 18,000 restaurants in 100 countries. The two companies would however continue to operate on a standalone basis. Given their size, both companies would have greater purchasing power, economies of scale and efficiencies in marketing and operations.
Per the deal, Burger King’s headquarters would move to Canada — reportedly a move to derive benefits from tax inversion. Per reports, Canada's corporate tax rate of 26.5% is much less than 40% in the U.S. Therefore, the deal would allow Burger King to reduce tax liabilities by moving the fast-food chain’s base from Miami to Canada.
The tax rate in the U.S. is the highest and thus it is logical for firms based in the country to find alternatives to reduce their tax burden. Tax inversion involves the acquisition of a foreign company and subsequently adopting its home country’s domicile. Alternatively, the combined entity can create a holding company in a country where tax rate is lower.
No matter what it costs, trimming the tax burden will eventually enable U.S. firms to have more cash in their pocket. This additional cash along with a better product portfolio and a skilled workforce acquired through acquisitions should help these firms do better.
Over the past few quarters, sales and profits at U.S. fast food restaurants have been dampened due to a weak consumer spending environment and stiff competition. This deal would reportedly intensify competition for fast food chains like Dunkin' Brands Group, Inc. (DNKN), The Wendy's Company (WEN), McDonald's Corp. (MCD) and Starbucks Corporation (SBUX).
Burger King presently has a Zacks Rank #3 (Hold).
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