Burger King-Tim Hortons Merger Gets Canadian Approval - Analyst Blog

The long awaited $11.0 billion merger of Burger King Worldwide Inc. (BKW) and Tim Hortons Inc. (THI) has been approved by the Canadian government. The approval came after the companies agreed to fulfill certain conditions and brings Burger King one step closer to the completion of the transaction.

The deal is still subject to shareholders' approval who are expected to vote on the pending proposal on Dec 9, 2014. Burger King entered into a definitive agreement to buy Tim Hortons in August this year.

Conditions for Approval

In order to get approval for the deal to be partly financed by Warren Buffett, Burger King had to accept certain conditions. It has agreed to maintain the existing employment levels at Tim Hortons franchises across Canada while accelerating expansion in the U.S. and globally. Meanwhile, the company will also have to shift its headquarters to Oakville, Ontario from Miami, FL once the deal gets through as well as list the company on the Toronto Stock Exchange.

Among other conditions, Burger King has agreed to manage Tim Hortons as a distinct brand, without co-branding any locations in Canada or in the U.S.; maintain the Canadian franchisee rent and royalty structure at current levels for five years and ensure Canadians constitute at least 50% of the Tim Hortons' board.

Tax – The Debatable Issue

The location of the headquarters of the new company has been a bone of contention ever since the deal was announced. Burger King was criticized for making the deal to derive benefits from tax inversion by shifting its headquarters to Canada. The deal did not find favor with the White House either. Also, a number of people expressed their disappointment on social media websites like Facebook, Inc. (FB) and Twitter, Inc. (TWTR).

Also, rumors that the deal would result in extensive layoffs at Tim Hortons further attracted criticism.

Bottom Line

Nevertheless, Burger King has cleared the hurdles so far and has agreed to all conditions, thereby leading to the creation of the world's third-largest fast food company with a market value of roughly $18 billion. Burger King is the second largest fast food hamburger chain in the world, while Tim Hortons is the largest coffee and doughnuts seller in Canada. The combined business would generate about $22 billion in sales and constitute more than 18,000 restaurants in 100 countries.

Besides offering revenue synergies as a result of accelerated international growth, the deal would generate costs savings as well. Given their size, both companies would have greater purchasing power, economies of scale and efficiencies in marketing and operations. Moreover, both the companies would have the opportunity to expand their unique brands.