The companies, whose market values are comparable in size, confirmed late on Sunday that they were discussing a takeover of Tim Hortons by Burger King. They said the new entity would be based in Canada, which has a lower corporate tax rate than the United States, especially for entities with large amounts of earnings from overseas.
“The deal would be structured as a tax inversion, which could see a more favorable treatment for Burger King's foreign profits and create the third-largest global quick-service restaurant player,” Scotiabank analyst Patricia Baker said in a note to clients.
Shares of Tim Hortons were up nearly 20 percent at $75.23 on the New York Stock Exchange, while Burger King, which is majority owned by investment firm 3G Capital, rose more than 17 percent to $31.83.
“If Burger King can export itself to Canada, I understand the tax savings are in the order of 13 percent,” said David Baskin, president of Baskin Financial Services, which controls about 180,000 shares in Tim Hortons. “So that's got to be a win for the Burger King shareholders.”
Miller Tabak analyst Stephen Anderson said he did not expect any antitrust hurdles since the chains serve different quick-service segments, but he cautioned that the proposed deal could face political backlash on both sides of the border.
In Canada, critics are likely to be unhappy that the well-known Tim Hortons brand would once again fall into foreign hands. The deal is expected to raise hackles in the United States, with opponents decrying Burger King's plan to domicile in Canada to reduce its tax burden.
Recent attempts by companies to make tax inversion deals have drawn the attention of U.S. President Barack Obama, who criticized a “herd mentality” by companies seeking such agreements.
Tax inversions have become popular in recent months as low interest rates are making it cheaper for companies to make acquisitions, KeyBanc analyst Christopher O'Cull wrote in a note to clients about the potential deal.
Toronto-based investors and analysts expect Burger King to pay top dollar.
“As a Tim Hortons shareholder, we would expect at least C$85 a share equivalent, which is about 2.75 shares of Burger King for every Tim Hortons share,” said Baskin. “I think that would be a fair premium. Much less than that and they're going to start getting pushback from Canadian institutions.”
Raymond James analyst Kenric Tyghe said he expects Tim Hortons' take-out valuation range to be between C$85.00 and C$95.00 a share.
Anderson of Miller Tabak said a deal would benefit both sides.
“Tims would gain access to a broader array of potential franchise partners in the U.S., while Burger King would gain a company with historically strong operations,” Anderson wrote in a note to clients.
He said a deal would give Burger King access to popular coffee products that it could add to its 7,400-plus restaurants across North America, along with a doughnut and coffee chain brand that is growing in the United States in its own right.