EDITOR: | August 29th, 2014 | 4 Comments

Burger King and Tim Hortons win the battle for breakfast domination

| August 29, 2014 | 4 Comments
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bkBurger King has conquered Tim Hortons for $ 11.4 billion in cash and stock thanks to the contribution of hamburger connoisseur and finance wizard Warren Buffett. The merger of these companies will become one of the world’s largest and most powerful fast food chains. Upon completion of the merger, the newly formed parent company will have 18 thousand restaurants in more than 100 countries and revenues of $ 23 billion, making it one big world of fast food. There has been much speculation as to the motivations for the union. One of the most popular suggests that Canada’s lower business tax rate played a big role in persuading Burger King to look for partners north of the US border. Apart from his business acumen, Buffet has earned a reputation for supporting democratic and progressive causes, including the idea that those taking home higher incomes should pay more tax. In the case of Tim Hortons, Buffet has allowed his investment instinct to operate unencumbered by civic responsibility. Through the Tim Hortons acquisition, the Miami based Burger King plans to establish the headquarters for the newly formed blend of donuts and burgers – after all, there exists the ‘Luther Burger’, which does away with the sesame seed, placing the patty between a glazed donut – in Ontario, reducing the tax burden from the nominal all-American 40% to the Canadian 27%. Mr. Buffett was heard rebuking the stern reaction of the transaction from the White House, quoting Doug and Bob Mackenzie saying “take off, eh!”

Canadian authorities had their own concerns in approving the iconic and much beloved Canadian brand’s transfer to foreign hands. More than a business, Tim Horton is an Institution in Canada and is as popular in Vancouver as it is in Toronto or Montreal. It is no less a symbol of Canada than the Olympic ice hockey team. In response, the two companies, while sharing the parent company 51% controlled by Brazil’s 3G Capital Management (Burger King’s owner); the two brands will operate independently. However, the Burger King’s quest for a more regal tax regime only partly explains the transaction. The two fast food groups clearly have complementary businesses and goals: Burger King wants to expand and Tim Hortons offered a well established international coffee and donut empire. What’s a King to do but to take it over? Tim Hortons, for its part, has now found a powerful ally to help it spread in the United States, where it is still weak. The ‘King’ can also help Tim Horton take advantage of his vast international presence.

Mr. Buffett, moreover, has enjoyed a profitable relationship with 3G Capital. Last year they pulled USD$ 23 billion out of their coffers to buy HJ Heinz, king of the ketchup makers, in a transaction that has served as the model for the one involving Tim Hortons from the 9% yield to the business management remaining in 3G Capital’s hands. Finally, and unrelated to the urban legend that would have Tim Horts adding nicotine in coffee to make it more addictive, there is a more cultural inspiration for the caffeine fueled marriage of the burger and the donut. In the United States, there has been a fast food war over breakfast. Just last May, Burger King delivered a powerful hit, by including burgers in its breakfast menus. The goal is for customers to start their day in the way that suits them, savoring the barbecue flavor of their burgers and sandwiches if they wish or choosing one of its breakfast classics. As part of the breakfast strategy, Burger King also introduced a ‘Chicken and Waffle’ Sandwich, featuring a waffle and topped with sliced ​​chicken breast. These initiatives reflect the fact that fast food chains are targeting ever more niche breakfast customers, increasing the range of food far beyond the classic pancakes and coffee.

The Burger King-Tim Hortons merger may have also dealt a big blow to rivals Taco Bell and McDonald’s, which have been struggling to boost breakfast service sales. The ‘King’ has finally managed to wipe the smirk off of Ronald McDonald’s face. The Golden Arches have responded, a bit too late, by stretching the time slot dedicated to breakfast last spring, all but groveled, trying to seduce the public by offering free coffee during a much hyped two-week period. In March, Taco Bell announced the introduction of a breakfast menu in a TV ad campaign mocking Ronald McDonald, showing the famous clown enjoying breakfast served in Taco Bell restaurants. The menu features including a waffle taco. The latter is a waffle folded like taco, topped with egg, cheese, sausage or bacon. As a sauce, the brand offers a ‘lightly’ sweetened sauce to pour over the sandwich. And then there are Starbucks, Dunkin’ Donuts, all of which have invested in the breakfast market war. There is no word on whether Tim Horton’s famous ‘Timbits’ will change name to King’s Bits…


Editor:


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Comments

  • Dick van der Katz

    I think this is one of the better analyses of the Burger King/Tim Hortons deal. The strategy is to bank on the growing social phenomenon of ‘breakfast’ replacing lunch

    August 29, 2014 - 11:52 AM

  • Urban Girl

    This should be an interesting play to continue to watch with 3G’s slash and burn approach.

    August 29, 2014 - 2:28 PM

  • Tracy Weslosky

    Thanks Dick – Alessandro will appreciate the compliment. Personally, it has been at least a decade, maybe 2 since I could eat BK — but a hot cup of Timmy’s coffee gets me through my day. Think even my mother owns shares in Tim Hortons.

    We are going to see more and more North American mergers this Fall, and Canada offers some interesting tax incentives for those entrepreneurs that can wade through paperwork….

    August 29, 2014 - 3:24 PM

  • Nevada George

    Unfortunately for the US, this trend of “Inversion” is likely to continue.

    The argument put forth by some politicians regarding the corporate
    nominal tax rate versus the effective tax rate is a valid point.
    In that respect it may seem that the Burger King move to Canada is not
    a substantial tax savings.

    However, the BK merger goes beyond the tax savings gained by relocating to Canada.

    The merger will end the US taxation on BK’s revenue from world wide operations and that will be a substantial savings.

    That is a big incentive for other US based MNC’s to re-evaluate the benefit of headquartering in the United States.

    I suspect, that one concern that is not being openly discussed is that corporations do not trust the current US government — they may be afraid of their business being nationalized. Also, they may be detecting a pattern of “selective prosecutions” when the government levies corporate fines and penalties.

    There is also the possibility that the corporations are disgusted by government wasteful spending of tax revenue inside of the US and the expatriation of billions of those tax dollars to foreign countries with little or no audit trail.

    If you want an eye-opener scrutinize the State Departments “read outs” from January to August of this year — how many billions of tax dollars have been transferred to countries on the African Continent. Maybe, US corporations believe that this is not the “highest and best use of tax revenue” derived from their corporate profits.
    They may consider that US nation building should be a priority.

    Inversion will create a big sucking sound being emitted from the US banking system.
    Do you think that these MNC’s departing the US are going to leave billions in the US banks drawing negative interest?

    This will drop straight down to loss of disposable income for the US citizen.

    The loss of corporate revenue will have to be replaced — probably by increased individual income taxes or the creation of new consumption taxes. I imagine the first desperate move would be high federal taxes on gasoline followed by a long line of government revenue generation by esoteric confiscation of citizen wealth.

    The US, directly or indirectly, is importing millions of unemployed individuals that immediately are absorbed into the “Welfare Borg”. They need the big bucks to support this ever increasing monster drain on revenue.

    The US leaders will probably react to this trend of inversions by creating new regulation, laws, penalties, etc. — like they did with high wealth US citizens giving up their US citizenship and booking out.
    (Alternate tax scheme for expatriated individuals)

    Will a knee jerk reaction by national leaders overstep legal boundaries?
    Are they going to create legislation that limits the mobility of corporations?
    Will this set a precedent and trickle down to increased capital controls and
    restrictions on mobility of private US citizens?

    We, in the US, will start hearing on the mainstream media news, that is pipe-lined from capitol hill, that inversion is an atrocious unpatriotic act. This will incite the masses of the unthinking to declare they will boycott the products of the exiting corporations.

    I imagine this boycott will be short lived with Burger King — Americans love their adipose tissue building diets.

    I have been doing a little sentiment analysis on the average US citizen
    reaction to corporations leaving the US to reduce their tax liability.

    My Question: answer yes or no
    Q. Do you think it is unpatriotic for corporations to seek out tax reducing strategies?
    A. Yes, it is unpatriotic

    My response, OK — You are a great patriot—do your patriotic duty next time you file your federal tax returns and do not claim any deductions or exemptions.
    Their response, an empty stare and a deer caught in the headlight facial expression.

    The questions that we should be asking — is what can we do to create incentive for corporations to stay in the United States and entice foreign corporations to relocate to the US? The US government is always obsessed with the end results of a problem and avoids addressing causative factors.

    August 30, 2014 - 1:55 PM

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