Are burger bits next? Tim Hortons, Burger King in merger talks

In what could be a whopper of a deal for Tim Hortons, Burger King is in talks to buy the iconic Canadian company.

A joint statement by the companies says they hope to form a new corporation that would be based in Canada — although they would continue to operate as standalone brands.

New-York based investment fund 3G Capital owns a little over two-thirds of Burger King and is effectively proposing to build a Canadian holding company that would own both chains but operate them independently.

Right now, Burger King is based in Miami; Tim Hortons headquarters are in Oakville, Ont. But the coffee chain only recently returned to its origins as a purely Canadian company. For years, it was owned by U.S. burger chain Wendy's before being spun out in an IPO in 2006.

If a merger is completed, the new company would become the world's third-largest quick-service restaurant chain, with more than 18,000 locations and sales of about $22 billion.

So what's behind the merger?

Business commentator Michael Hlinka said on CBC Toronto's Metro Morning on Monday that Burger King may be making a "tax inversion" play with this move.

The basic U.S. corporate tax rate is about 35 per cent, while Canada's, depending on the province, is around 26 per cent.

"There's that extra nine per cent of value that they're right now giving away," said Hlinka.

By merging with a Canadian company and setting up a head office in Canada, U.S. companies can sometimes achieve significant tax savings, Hlinka said.

"You've got to merge with a company one-quarter your size ... then you can technically set up your headquarters in Canada, even though you still keep everybody in the United States. It's almost like a mailing address more than anything else."

A number of U.S. pharmaceutical companies have tried similar moves in recent years, most notably Valeant, which bought up Mississauga, Ont.-based generic drugmaker Biovail in 2010. Valeant was U.S.-based at the time, but is now headquartered in Laval, Que., after buying what was then Canada's largest drug company.

Pfizer also recently tried to buy AstraZeneca in order to move itself to England, which has a much more favourable tax regime.  Two other U.S. drug firms, Medtronic and AbbVie, are also in the process of trying to buy two Irish drug companies, again, largely for tax reasons.

That's not to suggest that taxes are the only factor at play here — Burger King is, after all, trying to get its hands on a successful business in its own right.

Tims released earnings on Aug. 6 that beat expectations, and the stock has been rising ever since. Share in Tim Hortons on the TSX had gained almost 15 per cent in the last two weeks even before the Burger King news broke over the weekend.

Burger King shares have also been doing well, so the deal won't be cheap for 3G — shares in both Tim Hortons and Burger King have never been more expensive.

Burger King and Tim Hortons confirm they are in merger talks, and if consummated, the move would create the world's third largest fast-food restaurant chain. (Patrick Morrell/CBC)

Canada's federal corporate tax rate is 15 per cent, and Ontario currently tacks on another 11.5 per cent, putting  the total tax bill for a company residing in Ontario at 26.5 per cent.

Burger King's latest annual report reveals that thanks to some generous tax breaks on overseas profits, the company's effective tax rate last year was 27.5 per cent — not egregiously higher than the company would have paid if it were based in Ontario.

Indeed, beyond tax savings, Burger King may also be trying to keep pace with a key competitor, Hlinka said.

"McDonald's has become very serious about making a good cup of coffee in the past several years and Burger King hasn't really stepped up, so maybe this is how they're going to compete with McDonald's globally," he said.

So what's the upside for Tims?

"If Tim Hortons gets its coffee into all those Burger King stores worldwide, that would be absolutely huge for it, and I think that might be part of this strategy as well," he said.

The company also says any transaction will be structured to deepen the connections each brand has with its customers, franchisees, employees and communities.

CBC's Michelle Cheung spoke to customers at a busy Tim Hortons location in downtown Toronto on Monday morning.

Jesse Babwah, a regular Tim Hortons customer, said he's concerned that a merger with the U.S. burger giant could erode Tim Hortons's unique Canadian flavour.

"I like that Tim Hortons has a lot of Canadian identity," he said. "And I hope it doesn't change too much from what it is now."

Hlinka however, doesn't believe a Burger King-Tim Hortons merger would mean big changes for the customer picking up his daily double-double. He said Burger King would be unwise to tinker with Tim Hortons successful model.

"Tim Hortons just had fantastic [earnings] results, they're making money, they're expanding their offerings, they're doing a lot of things right on the execution end," he said.

"This company just has this incredible momentum behind it that just makes the company work. It's worked for the past 45-50 years, it's going to be with us for another 45 or 50," he said.

"If you go through some of the underground food courts, there will be a lineup at Tim Hortons that will stretch seemingly around the block, meanwhile there's five other places selling coffee and people are just like, 'No, I'd rather wait for the Tim Hortons coffee.'"

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