Burger King, Tim Hortons Confirm Talks Regarding Potential Strategic Deal

(RTTNews) - Following media reports, Burger King Worldwide, Inc. (BKW) confirmed late Sunday that it is in talks to acquire Canadian quick-service restaurant chain Tim Hortons, Inc. (THI, THI.TO) to create a combined entity that will be publicly-listed and headquartered in Canada. The deal will help Burger King to shift base to Canada and save it from paying high U.S. corporate taxes.

The potential deal between Burger King and coffee and doughnut chain Tim Hortons would be structured as a so-called "tax inversion" deal. The combined entity would be the world's third-largest quick service restaurant company, with about $22 billion in system sales and over 18,000 restaurants in 100 countries worldwide.

Such tax inversion deals are currently increasingly common among U.S. healthcare companies as the U.S. overhauls its healthcare system under the Affordable Care Act.

The companies are increasingly looking at inversions as an option to escape the high rate of corporate taxes in the U.S., which is among the highest in the world. The statutory corporate tax rate in the U.S. is currently 35 percent, while it is reportedly between 14 to 25 percent in Canada.

Some of these companies are sitting on huge cash hoards in their overseas subsidiaries and would be heavily taxed if they repatriated these funds to the U.S. However, U.S. lawmakers are now targeting legislation aimed at curbing U.S. companies from doing inversions.

This particular move by Burger King is expected to attract intense criticism from the regulators as it is primarily known as an American brand.

"The transaction remains subject to negotiation of definitive agreements. There can be no assurance that any agreement will be reached or that a transaction will be consummated. Tim Hortons and Burger King do not intend to comment on this matter further unless and until a transaction is agreed or discussions are discontinued, and specifically disclaim any obligation to provide further updates to the market," the two companies said in a combined statement.

The potential deal will see Brazilian private equity firm 3G Capital continue to hold a majority stake in the combined entity on a pro forma basis, with the remaining stake to be held by existing shareholders of Burger King and Tim Hortons. The two brands will also operate on a stand-alone basis in order to preserve the strong relationship that consumers have with these iconic brands.

Apart from saving tax for Burger King, the deal will boost Oakville, Ontario-based Tim Hortons' growth in international markets by leveraging Burger King's worldwide footprint and experience in global development.

Burger King has a current market capitalization of $9.54 billion, while Tim Horton is valued at $8.35 billion. However, Tim Horton generates more than three times Burger King's revenue, and also makes more profit.

Tim Hortons is one of the largest publicly-traded restaurant chains in North America based on market capitalization, and the largest in Canada. As of June 29, 2014, Tim Hortons had 4,546 systemwide restaurants, including 3,630 in Canada, 866 in the U.S. and 50 in the Gulf Cooperation Council.

Meanwhile, Burger King is the second largest fast food hamburger chain in the world. It operates in over 13,000 locations serving more than 11 million guests daily in 98 countries and territories worldwide, with about 100 percent of the restaurants being owned and operated by independent franchisees.

BKW closed Friday's regular trading session at $27.11, up $0.27 or 1.01% on a volume of 0.47 million shares, and THI closed at $62.84, up $1.69 or 2.76% on a volume of 0.37 million shares.