* Deal set to create fast food giant with $18 billion market
* Deal to be structured as a so-called tax inversion
* 3G Capital to own majority of the shares in new combined
(Adds analyst comment, background)
By Soyoung Kim and Euan Rocha
NEW YORK/TORONTO, Aug 24 Burger King is
in talks to acquire Canadian coffee and doughnut chain Tim
Hortons Inc in a deal that would create a fast food
powerhouse with a market capitalization of roughly $18 billion.
Burger King and Tim Hortons, comparable in size by market
value, confirmed their merger discussions late on Sunday, saying
the new company would be the world's third-largest quick service
restaurant. It would be based in Canada, which has lower overall
corporate taxes than the United States, especially for entities
that have large amounts of earnings from overseas.
The proposed deal would be structured as a so-called tax
inversion transaction to move Burger King's domicile out of the
United States, and could come as soon as in the next few days,
according to sources familiar with the discussions.
Recent attempts by companies for tax inversion deals, which
are done to avoid higher U.S. taxes and save money on foreign
earnings and cash held outside the United States, have drawn the
attention of President Barack Obama, who criticized a "herd
mentality" by companies seeking such deals.
Tax inversions have become popular in recent months as low
interest rates are making it cheaper for companies to make
acquisitions, KeyBanc analyst Christopher O'Cull wrote in a note
to clients about the potential deal.
Tim Hortons, on a forward earnings basis, is trading at a
discount to Burger King, noted O'Cull. This factor likely makes
an acquisition of the only slightly less valued Canadian chain
Walgreen Co recently decided against a tax inversion
deal in its takeover of European pharmacy chain Alliance Boots,
saying it was not in the best long-term interest of shareholders
to attempt to re-domicile outside the U.S.
Amid heightened political sensitivity in the United States
to such tax-cutting transactions, Walgreen said it was mindful
of the public reaction to a potential inversion deal.
3G MAINTAINING MAJORITY
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.
3G, a New York-based investment firm with Brazilian roots,
acquired the then struggling Burger King in 2010 for about $3.3
billion. It later took the company back to market in 2012 but
still owns nearly 70 percent of the firm's shares, according to
Thomson Reuters data.
Tim Hortons and Burger King are set to operate as standalone
brands within this new entity while benefiting from shared
corporate services, the companies said.
Burger King said its experience in building a large global
footprint would allow it to help accelerate Tim Hortons's growth
in international markets.
Under the stewardship of new Chief Executive Marc Caira, Tim
Hortons recently posted results that beat analyst estimates, as
moves to introduce new, pricier menu items helped boost profits.
The chain, which has struggled with a U.S. expansion in recent
years, is fending off mounting pressure on its home turf from
well-capitalized rivals such as McDonald's Corp and
If a deal gets sealed this wouldn't be the first time the
iconic Canadian restaurant chain moves into foreign hands. It
was bought by Wendy's International Inc in 1995, but later spun
out in 2006 after the fast food chain came under pressure from
activist investor Nelson Peltz.
While operated from Oakville, Ontario, it kept its corporate
headquarters in Delaware before moving it back to Canada in
2009. Canadian Prime Minister Stephen Harper took some credit
for the move, citing the Conservative government's decision to
cut the corporate tax rate.
Since coming to power in 2006, the Conservatives have cut
Canada's corporate tax rate to 15 percent. Public companies also
have to pay provincial corporate taxes that then bring their
combined federal and provincial tax rate to about 25 percent or
Tim Hortons and Burger King said they do not plan to comment
on this potential deal further unless and until a transaction is
agreed, or discussions are discontinued.
Burger King, founded in 1954 and headquartered in Miami,
Florida, operates over 13,000 locations in nearly 100 countries
and territories across the globe. It has a market capitalization
of about $9.55 billion.
Oakville, Canada-based Tim Hortons operates more than 3,500
system wide restaurants in Canada and over 850 in the United
States. Its U.S. market cap stands at about $8.4 billion.
(Additional reporting by Chuck Mikolajczak, Olivia Oran, Mike
Stone and Jeffrey Hodgson; Editing by Leslie Adler, Stephen
Coates and Ryan Woo)