Burger King Worldwide (BKW) stock soared early Monday on the news that it’s looking to buy doughnut-and-coffee chain Tim Horton’s (THI) in a tax-savings deal that would move the hamburger chain’s headquarters to Canada.
Tim Horton’s ownership has changed so many times over the last 20 years, you’d think the market would be inured to such news. Indeed, the company was once owned by burger-chain rival Wendy’s (WEN).
But the idea of selling Tim Horton’s to Burger King to create the world’s third-largest fast-food chain was met with thunderous approval from the market. Heck, THI stock shot up more than 16% before the market even opened, and remains up almost 25% as of this writing.
The new company would have a market cap of roughly $18 billion, generating revenue of $22 billion from 18,000 locations in more than 100 countries. THI would benefit from Burger King’s expertise in international expansion and development, while BKW would gain from having a partnership in the high-margin coffee business.
But that’s not the key to the deal, and the potential fallout could make it hard for other companies to follow in Burger King’s footsteps.
Burger King wants Tim Horton’s for the coffee and doughnuts, sure, but what it really wants is to be a Canadian company, because corporate taxes are lower in the land to the north.
Burger King, You Want Fries with that Tax Inversion?
So-called tax-inversion deals have become more popular recently, especially with U.S. healthcare companies moving to Europe. By essentially renouncing its U.S. corporate citizenship, Burger King could save money on foreign earnings, as well as on any cash held overseas. A lower corporate tax rate doesn’t hurt either.
AbbVie (ABBV) and Medtronic (MDT) are two of the most recent examples of U.S. companies buying up healthcare companies in Ireland for the tax benefits. Walgreen (WAG), to its credit, just shot down the idea of doing a tax-inversion. There are more to come — at least as long as they’re still doable and worth the bad press.
Burger King is a huge and particularly American brand, and that’s sure to generate even more scrutiny over the inversion. The federal government hates anything that depletes its coffers, and the idea of U.S. companies acquiring foreign citizenship to get out of paying U.S. taxes has already brought down some heat.
The White House has called on congress to put a stop to inversions, and the Treasury Department is working on it, too. Nothing is imminent, but the laws could change, limiting or ending the benefits of inversions.
For now, though, the market is thrilled with Burger King’s talks to buy Tim Horton’s, and it looks good enough on paper. The fast-food business is tougher than ever. Anything BKW can do to bulk up and differentiate itself is a welcome idea.
Just don’t be surprised if this is the deal that ultimately turns the public and political tide against inversions.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
