Burger King faces tax controversy after $11bn Tim Hortons purchase

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Burger King confirmed on Tuesday that it is to buy the Canadian coffee-and-doughnut chain Tim Hortons for about $11bn, in a deal that re-ignited the controversy over American companies moving their headquarters abroad to secure lower tax rates.

As part of the acquisition, the corporate headquarters of the new company will be in Canada, a move that may help Burger King lower its tax burden but exposed the company to a welter of criticism after it was confirmed.

The deal will bring 18,000 restaurants in 100 countries under the control of Brazilian private equity firm 3G Capital. Burger King already operates 14,000 restaurants in 98 countries, nearly all of which are franchisee-owned.

Burger King’s operational headquarters will continue to be based in Miami, Florida, and Tim Hortons will run its business from Oakville, Ontario. The brands will continue to operate independently, the companies said.

3G Capital will own about 51% of the new company. Warren Buffett’s Berkshire Hathaway is helping finance the Tim Hortons deal with $3bn of preferred equity financing, but will not have a role in managing operations.

The announcement met an immediate backlash on Burger King’s Facebook page. “If you attempt to buy Tim Horton’s for the purposes of evading US Taxes, I will NEVER step foot in another Burger King again,” wrote Facebook user Gabe Gibbons. By 10:30am ET more than 1,400 other users liked the comment, and hundreds replied.

On Twitter, users expressed their distaste for the company going abroad with the hashtags #BoycottBurgerKing and #BoycottBK.

Bernie Sanders, the independent junior senator from Vermont, said on Tuesday that Americans were “sick and tired” of big corporations “not paying their fair share of taxes”.

When news of the deal leaked on Monday, Democratic Ohio senator Sherrod Brown, a member of the Senate finance committee, called for a boycott.

“Burger King’s decision to abandon the United States means consumers should turn to Wendy’s Old Fashioned Hamburgers or White Castle sliders,” said Brown, in a statement. “To help business grow in America, taxpayers have funded public infrastructure, workforce training and incentives to encourage [research and development] and capital investment. Runaway corporations benefited from those policies but want US companies to pay their share of the tab.”

The corporate tax rate in Ontario is 26.5%, which on the face of it is more favourable than the 35% levied in the US. But in practice, few US corporations pay the full rate.

Attempting to limit the damage from the announcement on Tuesday, Burger King insisted the deal was not about tax. “As you know, our tax rate today at Burger King is in the mid- to high-20s and the Canadian tax rate is in the mid- to high-20s, and we don’t expect our tax rate to change materially,” said Daniel Schwartz, CEO of Burger King. “This transaction is not about tax rate, it’s about growth.”

Nevertheless, the deal is a challenge to the Obama administration. Barack Obama has described the process of tax inversions as an “unpatriotic loophole”, but the White House was unable to gather enough support in Congress to pass legislation banning the practice before the summer recess.

Instead, the administration hoped that the uncertainty created by the threat of political interference might be enough to deter such deals for the time being, as had happened earlier this month when the Walgreens drugstore chain dropped its plan to move its headquarters to Europe as part of its takeover of Alliance Boots.

But Burger King’s management appears to have called the president’s bluff and – perhaps sensing the risk of pending political embarrassment – the administration was more subdued on Monday when asked directly about the deal, which was then reported to be imminent.

“The goal here is to change the law and get Congress to pass legislation that would prevent the ability of American corporations to renounce their citizenship all in pursuit of trying to get out of paying their fair share of US taxes,” said the White House spokesman Josh Earnest, declining to mention Burger King by name.

Some Democrats in Congress have been urging Obama to take executive action to close what they see as a loophole in the tax law on inversions, but this would leave the administration open to legal challenge and inflame an already tense relationship with Republicans who would be needed to pass any longer-term and more binding legislation.

The deal, which must be signed off by American and Canadian regulators, as well as Tim Hortons shareholders, is the latest attempt at corporate transformation by Burger King. It has spent the past decade passing through private equity hands, with each successive regime attempting a turnaround, falling back, and then cashing out through a sale or a public listing.

In 2002, Burger King went public with the backing of Bain Capital, TPG Capital and Goldman Sachs Capital Partners. In 2010, those firms sold a majority stake in the burger giant to 3G Capital, which also attempted to improve its fortunes. By 2012, with the company’s profits half of those in 2009, 3G pushed Burger King to a public listing.

That listing, on the New York Stock Exchange, did not come through the usual route - an initial public offering, which requires months of preparation and public filings - but through a quickie merger with a shell company, Justice Holdings, that was already public.

Burger King is chasing the only growing part of the fast-food market: takeout breakfast. While takeout fast food hit a peak in 2000, quick breakfasts have been the only growing portion of the industry, according to Harry Balzer, vice president of the NPD Group. “Lunch and supper are much more important than breakfast, yet breakfast is the only one growing in traffic,” he said.

In merging with Tim Horton’s, which is known for its doughnuts and coffee, Burger King is also taking on a major rival: Dunkin’ Donuts. Of the top 10 fast-food restaurants, including McDonald’s, Starbucks and Taco Bell, only Dunkin’ Donuts has not lost customers in recent years, Balzer said.

Burger King will pay $65.50 Canadian ($59.74) in cash and 0.8025 common shares of the new company for each Tim Hortons share. This represents total value per Tim Hortons share of $94.05 Canadian (US$85.79), based on Burger King’s Monday closing stock price. Alternatively, Tim Hortons shareholders may choose either all-cash or all stock in the new company.

Tim Hortons stock rose more than 10% in Tuesday pre-market trading. Burger King’s shares, which had soared by almost 20% on Monday when reports of the deal emerged, fell slightly.

Powered by Guardian.co.ukThis article was written by Jessica Glenza and Heidi Moore in New York, and Dan Roberts in Washington, for theguardian.com on Tuesday 26th August 2014 17.40 Europe/London

guardian.co.uk © Guardian News and Media Limited 2010

 

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