Thesis:
U.S. based Burger King Worldwide Inc. is merging with Canadian breakfast giant Tim Hortons for more reasons than just tax breaks. I will explore the social environment in Canada for Tim Hortons, the issues that may arise from integration, and the corporate tax implications.
The Social Environment in Canada vs. the U.S.
Tim Hortons is Canada’s largest fast food chain best known for coffee and donuts. The brand and namesake are considered Canadian icons. In Canada, Hortons is twice as large as Burger King’s main U.S. competitor, McDonalds, and their coffee sales are 62% of the market. Hortons’ number one competitor Starbucks only takes 7% market share for coffee. The ability to outperform both McDonalds and Starbucks in a major international market has more appeal to Burger King than just avoiding taxes.
For Tim Hortons the appeal of a global customer base and name recognition that Burger King brings to the table is equally appealing. Burger King is in over 100 countries and has over 5,500 locations that Tim Hortons can expand into almost immediately. Burger King whose breakfast hours are the slowest of the three meals and bring far less traffic than its rival McDonalds, will gain much more than a cult following be integrating Tim Hortons coffee and donuts into their breakfast offerings. Burger King will also bring a ton of global expansion expertise to the relationship and allow Hortons to double in size with much less work than had they tried the expansion alone.
As discussed in class, this will also mean a strategic change for Burger King, who has always played follow the leader with McDonalds, accepted a second best strategy and has been stuck behind their competitor for years.
Issues with the Merger:
Two markets that will be hard to breach are the Northeast, where Dunkin Donuts reigns supreme and the Northwest where Starbucks will maintain their coffee dominance. Another issue is that Tim Hortons is a Canadian icon brand and Canadians eat more donuts per capita than any other nation. Canadians also feel an emotional attachment to the brand and may resent a U.S. based Burger King merger. In contrast, U.S. patrons do not feel the same attachment to Hortons and may not adopt the products in the same fashion as Canadian patrons.
Corporate Tax Benefits:
Last month (Sept 23, 2014), new regulations on companies looking to reduce their tax bills by way of foreign acquisitions were proposed. Although, Tim Hortons SVP of public and government affairs claims, “the deal has always been driven by long-term growth, not by tax benefits.”
Despite these new regulations on “inversion,” the deal still makes sense for tax purposes and may skirt the new regulations.
“One advantage for Burger King becoming a Canadian entity with Tim Hortons is that the combined company could potentially avoid paying U.S. tax rates on earnings repatriated from future expansions in foreign countries, which is a big part of both brands’ future growth strategy. As Fitch [Ratings Agency] noted, “Canada’s territorial tax system is to likely provide a more tax-efficient way to access this growing base of earnings.”
The transaction “would likely be safe from the U.S. Treasury’s latest effort to curb these deals,” said Kenric Tyghe, analyst with Raymond James. He notes that the latest proposals doesn’t change the “substantial business activities” exception in existing regulations, which “lets companies with at least 25 per cent of their business abroad qualify as non-U.S. companies for tax purposes,” he said, adding that in the case of Tims-Burger King, about 68 per cent of combined revenues, and a large percentage of employees, will be based in Canada.”
So even with the new regulation, the tax benefits are still a factor.
Conclusions:
As we discussed in class, Tim Hortons has better quality control and operates better than Burger King and will definitely be bringing many of their best practices to Burger King. Hortons/King may also take advantage of the Hortons dining environment and patrons that tend to stay longer, meet others there, and foster business with lingerers who like to stay and work at their establishments. Hortons will be taking advantage of Burger Kings global experience and current penetration to expand quickly.
In conclusion, the U.S. based Burger King Worldwide Inc. merging with Canadian breakfast giant Tim Hortons has far more benefits than just tax breaks and we explored the social environment in Canada for Tim Hortons, the issues that may arise from integration, and the corporate tax implications.
Posted By: Michael Lind
Wednesday, April 22nd 2015 at 5:01PM
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