Tim Hortons and Burger King have confirmed that they plan to merge and move their combined company’s tax domicile to Canada.
This manoeuvre is known as a tax inversion, and these types of deal have had Congress in an uproar as they enable once-U.S. corporations to stop paying taxes in the U.S. and pay them elsewhere.
Perhaps the most peculiar aspect of this deal is the involvement of Warren Buffett’s Berkshire Hathaway. The Wall Street Journal first reported on this on Monday evening.
Buffett is a vocal proponent of having wealthy Americans pay higher taxes. However, Berkshire is effectively helping Burger King dodge taxes.
Specifically, Berkshire Hathaway will be providing $US3 billion in preferred equity financing.
“Berkshire is simply a financing source and will not have any participation in the management and operation of the business,” the companies said in their announcement today.
Preferred equity allows the investor to receive a dividend while gaining equity like exposure to the company. These securities are senior to common equity but subordinate relative to debt. In other words, they tend to be safer than the stocks, but they offer better returns than bonds.
Burger King Investors Are Thrilled
Burger King shares were already up as much as 22% on Monday following the news that the company was in negotiations to take over the Canadian doughnut chain.
As Business Insider’s Haley Peterson has written, the offer is most likely part of a huge cost-cutting plan for Burger King, which has been trying to reinvent itself in recent years. The deal will allow Burger King to move its headquarters to Canada, which could help it save money on taxes. After the takeover, Burger King and Tim Hortons will have 18,000 restaurants in 100 countries, and the company will be worth about $US18 billion.
In an in-depth article this summer called “Burger King Is Run By Children,” Bloomberg Businessweek noted the fast-food giant had been acting more like a startup than a burger chain lately.
3G Capital, a Brazilian private equity firm, bought Burger King for $US4 billion in a leveraged buyout in 2010, that article pointed out. 3G also owns H.J. Heinz along with Buffett’s Berkshire Hathaway. 3G’s cofounder, a 74-year-old billionaire, likes to bring in young executives to shake things up, Bloomberg Businessweek reported.
In just 13 months on the job, Burger King’s 33-year-old CEO Daniel Schwartz fundamentally restructured the burger chain, as BI’s Hayley Peterson noted last month.
A wunderkind with no fast-food experience, Schwartz spent his first months on the job making burgers, cleaning toilets, and interacting with customers in actual Burger King restaurants. He soon realised a complicated menu was slowing things down, so he streamlined Burger King’s offerings.
His restructuring appears to be paying off. In the first quarter of this year, Burger King’s net income nearly doubled to $US60.4 million.