Tim Hortons Doughnuts, Domicile Worth Top Price: Real M&A

For Burger King Worldwide Inc., doughnuts and a lower tax bill are worth the restaurant industry’s most expensive price tag.

Already trading at a record, Tim Hortons Inc. surged 19 percent yesterday after Miami-based Burger King said it’s in talks to buy the Canadian chain and move its legal address north of the U.S. border, where corporate tax rates are lower. The companies today announced a deal in which Tim Hortons’ investors will receive C$65.50 in cash and 0.8025 a share of the combined entity for each share they own, or about C$94.05 based on Burger King’s closing price yesterday.

That price would value Canada’s biggest seller of doughnuts and coffee at almost 17 times its profit in the last year, topping the highest multiple paid among similar restaurant deals. Tim Hortons deserves an above-average valuation, given the potential to boost revenue and cut costs, said Morningstar Inc. The company’s sales are projected to grow about five times faster than Burger King’s through 2016. A takeover also would ramp up Burger King’s ability to compete with McDonald’s Corp. at breakfast time, said Miller Tabak & Co.

Burger King’s pursuit of Tim Hortons is about “more than just lowering taxes,” Stephen Anderson, a New York-based analyst at Miller Tabak, said in a phone interview. “It’s a very attractive name to own and probably one of the few in quick services showing any kind of rapid growth.”

Market Message

3G Capital, the investment firm that owns Burger King, will have about 51 percent of the new company. Warren Buffett’s Berkshire Hathaway Inc. has committed $3 billion of preferred equity financing, though the Omaha, Nebraska-based firm won’t participate in managing the restaurant business.

The possibility of a takeover sent Tim Hortons shares to a new high of C$82.03 yesterday. The stock had already climbed almost 15 percent through last week after the Canadian coffee and doughnut seller reported second-quarter earnings on Aug. 6 that beat analysts’ estimates.

Today, Tim Hortons shares climbed an additional 8 percent to C$88.71.

“We own about 160,000 shares, so we’re happy,” David Baskin, president of Baskin Financial Services, which oversees about C$700 million ($637 million), said in a phone interview before the terms of Burger King’s offer were announced. “The market is saying right now, ‘Don’t bother us with a bid lower than C$80. C$85 will get our attention and C$90 will seal the deal.’”

Burger King’s offer of C$94.05 a share values Tim Hortons at about C$14 billion, including net debt, or 17 times its earnings before interest, taxes, depreciation and amortization in the last 12 months. The median multiple for similar-sized takeovers of public restaurant operators is 9.4.

Coffee Talk

Burger King may be looking to tap into Tim Hortons’ growth potential and strong presence in the breakfast market, said Anderson of Miller Tabak.

Analysts forecast Tim Hortons will boost sales to C$3.9 billion by 2016, up 19 percent from C$3.3 billion last year. Burger King is projected to increase revenue just 3.9 percent over the same period.

Tim Hortons would give Burger King a strong coffee label, just as McDonald’s seeks to boost the following for its McCafe brand by teaming up with Kraft Foods Group Inc. to sell packaged coffee at supermarkets.

“Burger King has had breakfast for a number of years but they have not been able to crack the code to McDonald’s historical success in this area,” Anderson said. Tim Hortons “will provide at the very onset an effective entry into the coffee market.”

Expansion Runway

For Tim Hortons, combining with Burger King would give the company the platform it needs to step up U.S. and international expansion, according to Kenric Tyghe, an analyst at Raymond James Financial Inc. Shareholders Scout Capital Management LLC and Highfields Capital Management LP have criticized the company’s strategy in America, where it has failed to build the same following the brand enjoys in Canada.

“The runway in both the U.S. and internationally is meaningful, and all the more compelling, with a parent able to lever its global footprint and expertise,” Tyghe wrote in a report yesterday. He had estimated that Tim Hortons could command as much as C$95 a share in a takeover.

Political Pushback

Burger King is one of the most prominent companies to join a growing list of U.S. firms that have traded domestic addresses for tax advantages. A takeover may draw significant political pushback, as President Barack Obama calls on his administration to take action to stop such inversion deals, with or without Congress.

An inversion won’t lower Burger King’s tax rate dramatically, though small cuts can still make a difference, said R.J. Hottovy, a Chicago-based analyst at Morningstar. Burger King’s effective tax rate in 2013 was 27.5 percent, higher than the typical corporate levy in Canada.

“There is a mild tax benefit,” Hottovy said by phone. It’s the potential revenue boost and cost-saving opportunities that make Tim Hortons “something they’d be willing to pay up for.”

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