Mergers and Acquisitions: Burger King and Tim Hortons - Case Study Example

Running Head: FINANCIAL MANAGEMENT-MERGERS AND ACQUISITIONS FINANCIAL MANAGEMENT-MERGERS AND ACQUISITIONS: BURGER KING AND TIM HORTONS By Name Code+ course name Professor’s name University name City, State Date Financial Management-Mergers and Acquisitions: Burger King and Tim Hortons Introduction Giant Canadian coffee and donut retailer Tim Hortons announced a takeover by one of America’s biggest burger chains, Burger King, in August 2014. This merger presents a set of synergies for both companies that heavily rely on their financial performance over the past several years. The following paper identifies, discusses, and analyses these synergies while focusing on the role of tax inversion in this merger. Burger King will benefit from taking over Tim Hortons in terms of improved menu resources, more sources of income, opportunities for growing earnings, and tax inversion although the latter is not a key motivator. Synergies The size of potential synergies is small as Burger King and Tim Hortons will continue working as distinct brands. As a result, only common corporate services and several purchase savings will enjoy any arising synergies. Burger King First, Burger King will experience an increase in revenue after taking over Tim Hortons (Kirby, 2014). Revenue increases will mainly occur through improved menu resources. Although menu resources will certainly not help Burger King outdo its current competitors like McDonalds, it will put the firm in an improved position to meet the gap. In addition, improved menu resources perfectly suit the takeover’s new model of concentrating strongly on international growth. Burger King knows Tim Hortons has been fighting to acquire a base on United States markets for several years now despite highly strong demand in Canada. At the same time, Burger King has been dealing with high competitive tension in the United States fast-food sector. For instance, Chipotle Mexican Grill recently led the country’s fast-casual section. A new source of revenue is another benefit for Burger King in this merger (Wright, 2014). Burger King has been facing stiff competition from coffee brewers and retailers McCafe and Starbucks. This tension led to Burger King’s record of low revenue between 2011 and 2013. Burger King is learning from this competition and believes the merger can reinforce its brand demand and match it with McCafe or Starbucks’ brand demands. In this case, Tim Hortons’ menu is diverse with breakfast segments that rival those of Starbucks. Tim Hortons has a market share of over 70% for baked foods and 75% for coffee in Canada (Tim Hortons Inc., 2013). These figures surpass both of Starbucks and McDonalds’ market shares in Canada, which Burger King considers a source of revenue for the merger. Burger King will also enjoy improved earnings growth opportunities than Tim Hortons. Tim Hortons’ annual report for FY2013 showed yearly sales of over $3 billion, which is a stable rate of growth with constant margins (Tim Hortons Inc., 2013, p. 110). During the same fiscal year, Burger King fought against local firms in spite of owning over 7,000 retails in the United States. This is why Burger King believes the merger is its best opportunity for making earnings internationally. With only 280 Burger King stores in Canada, Burger King should improve its foothold in this economy through the merger. Other synergies include improved quality management and fiscal engineering (Cox, 2014). 3G Capital’s hopes to improve the management of burger king through this merger as it sees a sudden, radical rise in capitalization requires an equally radical rise in management quality. Lastly, the allure of fiscal engineering comes from the immense, amassed debt that Burger King will share with Tim Hortons after merger formalities complete (Cox, 2014). Tim Hortons Tim Hortons enjoys fewer synergies than Burger King does in this merger. First, similar to Burger King, Tim Hortons hopes to enjoy international expansion by merging with Burger King. A statement by both companies during the announcement of the takeover stated that the merger provides Tim Hortons with the potential to influence Burger King’s global footprint and practice in international development to speed up Tim Hortons’ expansion in foreign economies (Cox, 2014). The merger allows Tim Hortons to expand its coffee brand throughout Burger King’s 13,000 stores across the world (Wright, 2014). Unlike Burger King, Canada is already an economic stronghold for Tim Hortons and the global market is the next target. Burger King already has worldwide establishment that Tim Hortons can tap. The merger will also allow Tim Hortons’ investors to value both companies appropriately (Brownell, 2014). Tim Hortons enjoys this benefit more than Burger King’s investors do because its part in the combined effort is minimal. A merger means Tim Hortons will be listed on American and Canadian public markets. This means management teams of both firms would be paid according to the performance of the respective organisations they oversee. In the process, Tim Hortons would appeal to and keep a gifted management team (Cox, 2014). A third synergy is the prevention of a paltry growth within Canada. Despite enjoying high popularity and appeal in Canada, Tim Hortons’ market share is close to exhaustion. In fact, Tim Hortons CEO Marc Caira said the firm has been depending on the launching of new stores annually across Canada for higher returns (Kirby, 2014). With the resources and assistance of Burger King, Tim Hortons hopes to roll out new, innovative products that assure a stronger foothold in Canada. Tax Inversion During an inversion, a United States organisation establishes, takes over, or merges with another organisation from a nation with a lesser corporate tax rate and sets up headquarters in this new country (Schoen, 2014). In the process, the United States firm escapes high tax rates. United States corporations have been practicing tax inversion for more than thirty years now. However, a recent wave of inversions drove President Obama to demand Congress ends this loophole quickly (Schoen, 2014). Even though Canada has lower corporate tax rates than the United States, the Burger King/Tim Hortons merger might not be motivated by tax inversion. The national tax rate in Canada is 15% and the corporate tax rate in Ontario is 11.5%. Together, Burger King and Tim Hortons will pay taxes of 16.5%. In comparison, Burger King will evade a corporate tax rate of 40% in the United States. The United States already imposes high federal and corporate tax rates on Burger King for its overseas revenue. This imposition makes it unlikely that Burger King seeks to merge with a Canadian firm to evade high tax rates. Burger King’s annual report for FY2013 shows 58% of its total paid taxes were to both the United States and Canada (Burger King Worldwide, Inc., 2013, p. 89). The remaining 42% was from the many other nations Burger King has stores in. Burger King’s foreign returns were $98.15 million in 2013, assuming demographic percentage distribution is also applicable to net earnings. In addition, the United States taxes these returns at a rate of 35%, which adds up to $34.35 million (Burger King Worldwide, Inc., 2013, p. 53). This figure represents over 15% of Burger King’s total net earnings. This percentage is not significant considering the merger’s tax rate will not adjust materially after changing its headquarters. Performance Comparison In 2013, Burger King recorded net earnings of $233.7 million and $428.6 million by Tim Hortons (Burger King Worldwide, Inc., 2013, p. 103; Tim Hortons Inc., 2013, p. 72). Burger King’s record is a 6% decrease from FY2012 that it attributed to increased competition and the net refranchising of 360 stores in 2013 (Burger King Worldwide, Inc., 2012, p. 72). In terms of price-earnings ratio, Burger King actually seems to be a far less appealing investment for Tim Hortons (Multon, 2014). In relation to the United States consumer-discretionary industry, estimates for Tim Hortons are high. The price-earnings ratio on the revenues per share for Tim Hortons is 27.6 times relative to the industry’s 17 times. Tim Hortons’ price-to-audit, ratio is 7 times, cost-to-sales ratio is 11 times, and price-to-cash-flow ratio is 26.2 times are well above those of Burger King’s 3 times, 1.2 times and 11.8 times respectively (Multon, 2014). Bargaining Powers In spite of having fewer synergies than Burger King, Tim Hortons has the upper hand when it comes to bargaining. First, Tim Hortons operates on a largely franchised model that is very accessible with a number of cost benefits. This model gives Tim Hortons a lot of bargaining power with its dealers, as well as Burger King’s food suppliers, owners of prime land, or marketing entities. This model further enables Tim Hortons to retain some very healthy returns margins. Secondly, Burger King’s property holdings are very valuable to Tim Hortons (Brownell, 2014). Sharing these holdings is complex for any organisation collaborating with a franchise model. As a result, Tim Hortons can set up combination stores in Burger King locations easily while retaining separate brands (Brownell, 2014). Conclusion Burger King will enjoy improved menu resources, more sources of earnings, opportunities for growing earnings, and tax inversion by merging with Tim Hortons. Improved menu resources will cause boosts in earnings for Burger King while Tim Hortons exploits opportunities to grow internationally using Burger King’s property holdings. The product company will also enjoy reduced corporate and federal tax rates of 26.5% in Canada from Burger King’s former 40% in the United States. However, tax inversion is not a key motivator for the merger since Burger King’s total tax rates from the United States and Canada is 58%, which is more than rates it incurs from other countries combined. References Brownell, C 2014. Tim Hortons holds the ‘real power’ in Burger King deal, says industry expert. [online] Available at: [Accessed 18 December 2014]. Burger King Worldwide, Inc., 2012. Burger King Worldwide, Inc. – BKW, annual report 2011- 2012. Miami, FL: Morningstar Document Research. Burger King Worldwide, Inc., 2013. Burger King Worldwide, Inc. – BKW, annual report 2012- 2013. Miami, FL: Morningstar Document Research. Cox, R 2014. Burger King Wins Support Where Wendy’s Didn’t in Tim Hortons Deal. [online] Available at: [Accessed 18 December 2014]. Kirby, J 2014. Why Tim Hortons feels it needs Burger King. [online] Available at: [Accessed 18 December 2014]. Multon, C 2014. Burger King will need time to digest Tim Hortons. [online] Available at: [Accessed 18 December 2014]. Schoen, JW 2014. How Does a Corporate Tax Inversion Work? [online] Available at: [Accessed 18 December 2014]. Tim Hortons Inc., 2012. Tim Hortons, Inc. – TI, annual report 2011-2012. Oakville, OT: Morningstar Document Research. Tim Hortons Inc., 2013. Tim Hortons, Inc. – TI, annual report 2012-2013. Oakville, OT: Morningstar Document Research. Wright, L 2014. Tim Hortons-Burger King deal ‘out of left field’ but has ‘huge upside,’ observers say. [online] Available at: [Accessed 18 December 2014]. Read More