Is the Timmies in Redpath Café a sign of what is to come for the future of Canada’s staple coffee brand? The disappearance of Tim Hortons has acerbated students and it won’t get any better as exams approach. The outcries have already commenced as students lament on how productive they will be by eating macaroons and tiramisu instead of the classic Timbits and coffee. But what are the implications for all Canadians if Burger King buys Tim Hortons? How will the “Canadian-ness” of this company withstand the power of the Master of Whoppers?
Background on the Deal
The buyout is supposed to create synergies for both ends. A leveraged buyout is an acquisition of a company in which a financial sponsor invests a relatively small amount of equity (compared to the total purchase price) and uses leverage to fund the remainder of the purchase price. Under the $12.5 billion deal, both Burger King and Tim Hortons will be owned by an unnamed Ontario-based parent company while both keeping their respective headquarters in Miami, Florida and Oakville, Ontario.
The combined sales of the company will be $23 billion with 18,000 locations in 98 different countries. Shareholders of Tim Hortons (TH) have the option to be given $65.50 in cash and 0.8025 common shares in the new company, or as an alternative, each TH shareholder can receive an all-cash payment of $88.50 per TH share held or 3.0879 shares of the new company subject to pro ration.
As of September 12, Burger King is currently traded at $30.67 and Tim Hortons at $88.31. This takeover would create the third-largest fast-food restaurant provider in the world. Analysts are saying that this is a tax-inversion deal, meaning that Burger King (BK) is attempting to move its headquarters to Canada to relocate to a lower tax jurisdiction. Meanwhile, as of now, the company has assured that its headquarters will remain in Miami.
Burger King is also attempting to compete with McDonald’s McCafé, which is increasing in popularity, and thinks that it can achieve such a goal through this deal. A joint press release by both companies stated that both firms would continue to operate as “stand-alone brands.” After the deal, the CEO of Burger King, Daniel Schwartz, will retain his role in the new company while his counterpart at Tim Hortons will assume the position of director and vice chairman.
Tim Hortons is expected to gain global exposure from the deal, as it can capitalize on BK’s brand image and capital to market itself to consumers in the U.S. and abroad who are unfamiliar with the brand. However, will Tim Hortons actually be able to benefit from this deal?
TH’s “Aggressive Plan”
According to the current CEO of Tim Hortons, Marc Caira, the plan outlined by the company last February was for it to continue growing in Canada while maintaining a strong presence abroad. As of now, Timmies faces an oversaturation of the Canadian market – it boasts that it sells 8 out of 10 coffees consumed in Canada – so where are its opportunities for growth? It will launch this plan by first creating made-to-order paninis for its lunchtime crowd, which has been growing considerably. It will also try to expand itself in the dark roast coffee market. The plan entails the firm to open 500 restaurants in Canada (where it currently has 1,300 stores). In the United States it plans to open 300 more stores by 2018 in addition to its 850 existing ones. It also calls to add to the 38- strong network of stores in the Persian Gulf.
While some of its past-ventures have not worked, such as the five-year partnership to sell Cold Stone Creamery that ended this year, Caira believes that this is a match made in heaven. He believes that this merger will allow it to become the third major player in the coffee shop sector to break through the robust customer loyalty of the two established coffee players in the U.S (Starbucks Coffee and Dunkin’ Donuts). Ultimately, Caira wants create a world-class company based in Canada and have Americans understand the brand heritage of TH. Yet, these ideas brought forth by Caira are similar to a deal that occurred between Wendy’s and Tim Hortons in 1995.
Timmies’ Past History with Mergers
In 1995 Tim Hortons became a part of Wendy’s International Group (a direct competitor of BK and McDonald’s) to fulfill the same goals – growing abroad and gaining a foothold in the international coffee shop industry, while Wendy’s was looking for growth outside of the burger market.
However, in 2005 activist hedge fund Pershing Square Capital Management, run by Bill Ackman commanded a controlling stake in Wendy’s and demanded a spin-off of Tim Hortons due to “limited synergies” between the two companies. Also, Ackman was worried that Tim Hortons was going to attempt to purchase Dunkin’ Donuts, of which he wanted no part. The only thing that was left from the deal was the opportunity for both restaurant chains to be valued separately, and to list TH on public markets to allow its management team to be compensated based on the performance of the business.
How do we know that this will not happen again in a couple of years with BK? Analysts say that the quality of management brought forth by BK can help Tim Hortons astronomically. The three private equity owners, 3G Capital, bought BK in 2010 at a market cap of $4 billion, which has risen to a massive $11.5 billion today – showing that its business strategy has ameliorated the company’s value tremendously.
The allure of financial engineering occurring in this deal will combine $3 million of Preferred Stock to Warren Buffett’s Berkshire Hathaway while heavily increasing leverage. This will make it a publicly traded leveraged buyout allowing for hefty returns for investors.
How Does All of This Affect Canadians?
For starters, the prospective job market following this deal is slim. 3G Capital, BK’s holding company, is known for its aggressive cost-cutting measures to increase profits, most likely causing this deal to slash jobs for those currently working at Timmies. Nevertheless, because both companies vow to operate as two separate entities, it is unlikely that any of the products brought forth by TH will change and nor will any of its locations.
A poll created by Toronto’s The Star showed that Canadians are worried that the merger will “dilute Tim Hortons Canadian-ness.” That being said, it is reasonable to be worried that the smell of beef will overpower your morning routine while sipping Timmies’ signature Original Blend Coffee ™. The fear of losing its distinctive “Canadian flavor” is a major concern especially since it scores very high for its “authenticity among Canadians” according to Interbrand Canada.
Perhaps 3G will respect this in creating its business strategy after entering Canada. If it doesn’t, maybe after Premiere Moisson becomes a bust, a Tim Hortons and Burger King combo fast-food service will replace it in Redpath. For now, all we know is that the King really wants some coffee.