Burger King's executive team is polishing up their knowledge of coffee, donuts and all things Canadian as the company contemplates an acquisition of Tim Hortons.
On Monday, Burger King and Tim Hortons confirmed that the two chains are in discussions regarding the creation of a new, Canadian-based company together. The Wall Street Journal reports Burger King is in talks to buy the Canadian chain, in a deal that would be structured as a tax inversion.
According to the two company's joint press release, if Burger King and Tim Hortons team up, it will create the third-largest quick-service restaurant company in the world, after McDonald's and Yum Brands. The company, which would be publically-listed and maintain separate brands, would encompass $22 billion in system sales and over 18,000 restaurants in 100 countries.
Other than the size boost, why do the chains want to team up – and why is Burger King looking to move to Canada?
"A key driver of these discussions is the potential to leverage Burger King's worldwide footprint and experience in global development to accelerate Tim Hortons growth in international markets," reads the joint press release.
Factors not mentioned in the press release include the potential for lower taxes by moving the company to Canada, the country with the second-lowest corporate tax rates in the G-7. It'd be an on-trend move, as tax inversion deals – when companies relocate headquarters to a lower-tax country and reap the economic rewards – have been making headlines in recent months.
Health-care companies Medtronic and AbbVie both recently independently purchased Irish companies, as part of tax-inversion deals that will save both companies millions by transferring headquarters to Europe. Walgreens nearly did the same when it purchased European drug store chain Boots, but decided against an inversion deal after backlash.
With the influx in inversion deals, the government has spoken out against the practice and may soon take steps to prevent other companies from pursuing inversions. In July, President Obama said that companies that seek overseas mergers to avoid American taxes lack "economic patriotism."
However, according to The New York Times, people briefed on the matter say that the issue may actually be one of Canadian pride instead of anti-American penny pinching. The Times reports its sources say that Burger King would not save much money in taxes by moving headquarters to Canada, especially since the company reportedly does not have a significant amount of cash abroad.
Instead, Burger King may be promising to base the new company in Canada to get on the good side of Canadian authorities who can block a merge if deemed to not be in the best interests of the country. Since Tim Hortons is a resoundingly Canadian brand, authorities may be reluctant to surrender the company to American ownership.
Other potential bonuses of the merger include serving up Tim Hortons' well-established coffee at Burger King at a time when fast-food chains battle over coffee offerings and expanding both chain's prime hours (Tim Horton's is a go-to for breakfast, while Burger King's biggest recent breakfast innovation has been selling burger earlier in the morning).
Tim Hortons currently has 4,546 locations, 3,630 of which are in Canada. The chain has previous experience with burger restaurants: Wendy's acquired the company in 1995, and spun off the Canadian chain in 2006.
Burger King is much more global in its scope than Tim Hortons, with over 13,000 locations in 98 countries. The burger chain finished a super-sized refranchising effort in 2013 that resulted in essentially all locations being owned and operated by independent franchisees.
Since Brazilian private-equity firm 3G Capital Management bought Burger King in 2010, the chain has focused on cutting costs, with few notable successful, new products (the most-hyped new offering of 2013, Satisfries, was discontinued at most restaurants after only one year on the menu). Nonetheless, focusing on selling franchises has paid off so far, with Burger King's profit climbing 19 percent in the second quarter, the company reported earlier in August.