Burger King is in the midst of a potential takeover of Canadian coffee and donut chain Tim Hortons. Canadians, while still a mild bunch, are not thrilled with the idea.
"It's our brand," Holly Cosgrey, a 60-year-old Torontonian told Bloomberg News. "Timmy's is always trying new things, adapting, they always have good service, and you always get your coffee fast no matter how long the lineup is. Burger King may screw it up."
To understand what the Tim Hortons purchase means in the United States, you need to dig into to the arcane tax policies about inversions. But understanding what a takeover of Timmy's (as the chain is known north of the border) means to a Canadian is a story about culture and pride. It's about an American fast food company taking over a beloved institution older than the Canadian flag itself.
Tim Hortons is Canada's largest restaurant chain. With more than 3,600 locations across the country, that works out to one Tim Hortons for every 9,500 Canadians. (By contrast, Starbucks maintains a paltry one coffee shop for every 28,000 Americans).
Tim Hortons is ubiquitous in Canada. Canadians spend an average of $150 at Tim Hortons annually, higher than spending at any other store. As of 2008, it controlled 62 percent of the country's coffee market. Some researchers use the proximity of the nearest Tim Hortons to measure whether an area of Canada is rural or not. Really.
"It's our brand," Holly Cosgrey, a 60-year-old Torontonian told Bloomberg News. "Timmy's is always trying new things, adapting, they always have good service, and you always get your coffee fast no matter how long the lineup is. Burger King may screw it up."
To understand what the Tim Hortons purchase means in the United States, you need to dig into to the arcane tax policies about inversions. But understanding what a takeover of Timmy's (as the chain is known north of the border) means to a Canadian is a story about culture and pride. It's about an American fast food company taking over a beloved institution older than the Canadian flag itself.
Tim Hortons is Canada's largest restaurant chain. With more than 3,600 locations across the country, that works out to one Tim Hortons for every 9,500 Canadians. (By contrast, Starbucks maintains a paltry one coffee shop for every 28,000 Americans).
Tim Hortons is ubiquitous in Canada. Canadians spend an average of $150 at Tim Hortons annually, higher than spending at any other store. As of 2008, it controlled 62 percent of the country's coffee market. Some researchers use the proximity of the nearest Tim Hortons to measure whether an area of Canada is rural or not. Really.
Before he was known for a massively successful coffee and donuts chain, Tim Horton was a professional hockey player. Yes, this story is really that Canadian.
Born in Ontario, he spent most of his career with the Toronto Maple Leafs; for decades, he held the record for most consecutive games played for the team (486, to be exact). In the middle of his hockey career, Horton got into the franchise business, opening his first store in April 1964 under the name Tim Donut.
Tim Hortons grew quickly, as you can see in this most excellent graphic from Victoria Bloomfield's article, "Tim Hortons: Growth of a Canadian Coffee and Doughnut Chain."
It's popular, and ingrained in national culture in a way to that's difficult to compare to any fast food chain in the United States.
Tim Hortons finds itself into official Canadian moments with shocking ease. Like take the time that the Royal Canadian Mint wanted to distribute a new, commemorative quarter in 2004. It distributed that new coin exclusively through Tim Hortons locations. Let that sink in: the federal government was distributing new currency through a donut shop chain. You couldn't go to a bank and get this quarter; you had to go to Tim Hortons.
The Canadian Oxford Dictionary has added the phrase "double-double" to its list — that would be Tim Hortons-speak for a coffee with two creams and two sugars. When former Secretary of State Condoleezza Rice visited Canada in 2006, the foreign minister took her to a Tim Hortons for coffee.
"The chain is celebrated as a 'national institution' and is connected to broader ideas of cultural identity, an iconic status only partially connected to memories of Tim as a Canadian hero," University of Toronto sociologist Steve Penfold writes in his book, "The Donut: A Canadian History."
In that book, Penfold quotes one independent donut shop owner on the popularity of Tim Hortons: "They'll go anywhere," he says. "They could survive in the middle of Lake Ontario."
Maybe it's the quality of the coffee (there 's a longstanding rumor in Canada that Timmy's puts nicotine in its coffee to make it addictive, which has, unsurprisingly, turned out to be false). Or maybe it's the donuts. But the significance of Tim Hortons seems to really come down to its place as a long-standing, home-grown business that is everywhere in Canada.
Canada is a relatively small country that shares a border with one of the world's largest; it's easy for Canadian culture to get overwhelmed by American brands.
And Tim Hortons is a rare exception to that trend. Because of it, Starbucks has barely been able to get a foothold in the Canadian coffee market (it's the second largest coffee chain in Canada, but only holds 7 percent of the market). Even when you live in Canada, it's rare to see a homegrown brand that is so dominant.
More than a coffee shop, Tim Hortons is something that feels uniquely Canadian — in a way not many outlets (not really much of anything, for that matter) do. The vast majority of large chains in Canada are American, perhaps with a little homage to their newly-annexed land. Breakfast chain Denny's, for example, replaces the apostrophe in its name with a maple leaf in signage at Canadian locations; Pizza Hut uses the same maple leaf to dot the "i" in pizza.
But that's not the case with Tim Hortons: it's a massively successful, homegrown, definitely Canadian success. One that could soon have uniquely un-Canadian ownership.
That translates into on-the-ground help such as location mapping, knowledge of regional competition and networks of local suppliers.
More importantly, though, the burger empire has the capital needed by the Canadian icon to market itself to consumers in the U.S. and abroad who are unfamiliar with the brand.
Burger King's know-how may be most crucial in the highly-competitive American market where Tim Hortons has struggled since entering in 1984 in New York state.
"The coffee shop segment is crowded and you've got two huge players that have very good, very strong customer loyalty [in the U.S.]," said David Henkes, vice-president of Chicago-based food industry consultancy Technomic.
"Tim Hortons has sort of tried to figure out how to be that No. 3 player," but it's been a struggle in part because Americans don't understand "the brand heritage of Tim Hortons," says Henkes.
By 2018, the company plans to open 500 restaurants in Canada, with about half of them added this year alone. The company currently has more than 1,300 stores.
In the U.S., it hopes to expand its 850-strong network of stores with 300 more by 2018.
The company also has 38 restaurants in the Persian Gulf, where it's seen some success. There it hopes to add about 220 locations in the same time period.
Schwartz sees the Tim Hortons-Burger King deal as a "huge win" not only for the Canadian restaurant, but also for Canadian taxpayers in the long term.
The new merged company would be headquartered in Canada, where the corporate tax rates are substantially lower. The basic U.S. rate stands around 35 per cent, while Canada's is about 10 points lower, depending on the province.
"It would create a large world-class company based in Canada, paying taxes in Canada, increase the exposure of the Toronto stock market and potentially lead to more tax inversions of U.S. and foreign companies coming into Canada," said Schwartz. Tax inversions are the relocation of a company's headquarters to a country with lower taxes.
But ultimately, will it make any difference for the average Canadian?
No, says Middleton, not unless cost-cutting measures change the nature of Timmies.
"Canadians are very loyal, they don't change buying habits as fast as Americans, they're not as price seeking as Americans. They're more patient," said Middleton.
But if 3G takes it a step too far, they could find themselves faced with a profit-line that looks more like an inverted hockey stick, a sudden downward move, as Canadians say, "This is no longer my Tim's."
The new combined company would be based at the current headquarters of Tim Hortons, in Oakville, Ont. Burger King would continue to maintain its global home in Miami.
The deal is structured as follows:
3G Capital, the investment firm that owns Burger King, would pay $65.50 in cash for every Tim Hortons share already out there.
In addition to that cash, every Tim Hortons shareholder would get 0.8025 shares in the new, as yet unnamed company.
Shareholders also would have the right to choose an all-cash or all-stock option.
Tim Hortons CEO Marc Caira told CBC the deal is great news for the company, and for Canada. "There's nothing negative here about Tim Hortons in Canada," he said, adding there are no plans to have the two chains sell each others products — hamburgers in Tim Hortons and Tims coffee in Burger King, for example. "You're not going to see any interaction between the restaurants," Caira said.
Executives from the companies involved also poured cold water on theories that the move was an elaborate tax inversion chiefly designed to bring down Burger King's tax rate. Canada's basic corporate tax rate is about 26 per cent, while the U.S.'s is around 35 per cent.
But Burger King already managed to get its tax rate down to 27.5 per cent last year, company filings show. Tim Hortons paid 26.8 per cent tax in Canada last year, according the its annual report.
"We don't expect our tax rate to change materially" Burker King CEO Daniel Schwartz said on the call. Burger King will continue to pay federal, state and local taxes on U.S. earnings, as will Tim Hortons keep paying Canadian taxes, Schwartz reiterated — several times.
If the deal goes through as is, 3G would still control 51 per cent of the new company. Current Burger King shareholders would own 27 per cent, and current Tim Hortons shareholders would own the remaining 22 per cent.
Although Burger King has roughly twice as many locations as Tim Hortons, the Canadian chain takes in much more revenue from its stores.
Tims says it controls 28 per cent of fast food sales in Canada, including 75 per cent of all coffee and caffeinated beverage sales.
Although he didn't offer details, Schwartz says the combined company plans to pay a dividend — just as both the individual companies currently do.
The boards of both companies have unanimously approved the transaction. Two-thirds of Burger King is owned by 3G, so the deal has been consummated on that end, but Tim Hortons shareholders still have to approve it.
The deal is subject to numerous regulatory and anti-trust hurdles, including the Investment Canada Act. "The transaction ... is structured to bring significant benefits to Canada," Behring said, including the infamous "net benefit" test that has scuppered deals in the past.
Shares in the new company will list both on the TSX and NYSE.
Daniel Schwartz, CEO of Burger King, would also become CEO of the new company. Current Tim Hortons CEO Marc Caira would become a director of the new company, as well as its vice-chairman.
The new company's board would include the current eight Burger King directors and three Canadian directors to be appointed by Tim Hortons, including Caira.
Warren Buffett's company Berkshire Hathaway is helping finance the deal with $3 billion of preferred equity financing, but will not have a role in managing operations.
The deal is structured as follows:
3G Capital, the investment firm that owns Burger King, would pay $65.50 in cash for every Tim Hortons share already out there.
In addition to that cash, every Tim Hortons shareholder would get 0.8025 shares in the new, as yet unnamed company.
Shareholders also would have the right to choose an all-cash or all-stock option.
Tim Hortons CEO Marc Caira told CBC the deal is great news for the company, and for Canada. "There's nothing negative here about Tim Hortons in Canada," he said, adding there are no plans to have the two chains sell each others products — hamburgers in Tim Hortons and Tims coffee in Burger King, for example. "You're not going to see any interaction between the restaurants," Caira said.
Executives from the companies involved also poured cold water on theories that the move was an elaborate tax inversion chiefly designed to bring down Burger King's tax rate. Canada's basic corporate tax rate is about 26 per cent, while the U.S.'s is around 35 per cent.
But Burger King already managed to get its tax rate down to 27.5 per cent last year, company filings show. Tim Hortons paid 26.8 per cent tax in Canada last year, according the its annual report.
"We don't expect our tax rate to change materially" Burker King CEO Daniel Schwartz said on the call. Burger King will continue to pay federal, state and local taxes on U.S. earnings, as will Tim Hortons keep paying Canadian taxes, Schwartz reiterated — several times.
If the deal goes through as is, 3G would still control 51 per cent of the new company. Current Burger King shareholders would own 27 per cent, and current Tim Hortons shareholders would own the remaining 22 per cent.
Although Burger King has roughly twice as many locations as Tim Hortons, the Canadian chain takes in much more revenue from its stores.
Tims says it controls 28 per cent of fast food sales in Canada, including 75 per cent of all coffee and caffeinated beverage sales.
Although he didn't offer details, Schwartz says the combined company plans to pay a dividend — just as both the individual companies currently do.
The boards of both companies have unanimously approved the transaction. Two-thirds of Burger King is owned by 3G, so the deal has been consummated on that end, but Tim Hortons shareholders still have to approve it.
The deal is subject to numerous regulatory and anti-trust hurdles, including the Investment Canada Act. "The transaction ... is structured to bring significant benefits to Canada," Behring said, including the infamous "net benefit" test that has scuppered deals in the past.
Shares in the new company will list both on the TSX and NYSE.
Daniel Schwartz, CEO of Burger King, would also become CEO of the new company. Current Tim Hortons CEO Marc Caira would become a director of the new company, as well as its vice-chairman.
The new company's board would include the current eight Burger King directors and three Canadian directors to be appointed by Tim Hortons, including Caira.
Warren Buffett's company Berkshire Hathaway is helping finance the deal with $3 billion of preferred equity financing, but will not have a role in managing operations.
