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Summary

  • Burger King and Tim Hortons' merger is for more than tax purposes.
  • Look at Starbucks for a cross-branding example that’s done very well.
  • Burger-coke-and-French-fry loving Warren Buffett will help fund a Tim Hortons and Burger King merger.

I read a succulent Seeking Alpha article on the Burger King (BKW) and Tim Hortons (THI) proposed merger by 5i Research that I recommend reading here. The purpose of my brief article is to hopefully add to his.

First, I agree that such a merger is more than just tax evasion or tax incentives. If it weren't, then all sorts of mismatched high-profile publicly traded companies would be merging north of the border. It's almost certainly, at least in the minds of executives on both sides of the table, just the icing on the cake.

Second, I do agree that it would give Tim Hortons a leg up on expansion in the U.S. I should point out that although I agree that Tim Hortons hasn't had the best of success in U.S. expansion as it could, last quarter was nothing to sneeze at. In the U.S., same-store sales growth was 5.9%, while it was only 2.6% for Tim Hortons in Canada. Still, 5i Research is right overall since, despite the higher growth rate, the U.S. only contributed $9.3 million in operating income last quarter and was dwarfed by Canada's $188.9 million.

Third, breakfast; breakfast; breakfast. Breakfast is the fastest growing part of the fast-food industry, dominated by McDonald's (NYSE:MCD), which has 30% of it all by its lonesome. Burger King has always been in McDonald's shadow when it comes to the morning hours. Speaking from experience, I'll purposely grab breakfast at Burger King over McDonald's when traveling because in just about any city or town, almost always, without fail, the line will be short or nonexistent, while at McDonald's it is typically a mad house.

If there is one thing Tim Hortons knows it's breakfast and coffee. While the companies say in the release, "Tim Hortons and Burger King would operate as standalone brands," we know that's not the end of the story. There will be some cross-branding, obviously, starting likely with Tim Hortons brand coffee in Burger King.

And maybe Timmy will start offering some Burger King signature onion rings. As far as breakfast goes, the opportunity is still wide open for Burger King if it can do the right offerings, marketing, know-how, etc. One of the best benefits of the merger won't even be the brands or the operations, but the complementary management teams that can help each other with their weaknesses. Sort of the king of burgers (or is it the king of expansion?) meets the king of breakfast. (yeah, I know, McDonald's is really the king of both but you get my point).

For an example of how this may all go down, check out Starbucks (NASDAQ:SBUX) and its acquisition of the La Boulange Bakery chain. At the time of the announcement, La Boulange only had 19 locations under its belt. It has stayed a distinct brand in the two years since. However, Starbucks went ahead and put La Boulange baked goods in thousands of its Starbucks stores. You may have seen them. It's an example of cross-branding from an acquisition that I could see similar with Burger King and Tim Hortons. During a Starbucks presentation back in June, CFO Scott Maw stated,

"We did see specifically in croissants and chocolate croissants that sales have doubled since the launch of La Boulange in those products. We launched a breakfast sandwich platform in March that was inspired by La Boulange which means the recipes, the way it was presented, everything was heavily influenced by La Boulange, and we saw 50% increase in sales in that platform once we launched it."

Cross branding sometimes can work wonders. No wonder the stock prices flew of both Tim Hortons and Burger King on news of a deal brewing. It wasn't just about taxes.

The Real King Of Burgers Is Interested In Burger King

Strange timing. I was just reading on how Warren Buffett only finances deals these days when it's about as close to a sure thing as possible for him, along with some upside. I know, old news, but it was interesting to read a refresher and reading about various Buffett financing deals in history just before I happened to pen an article on the Burger King and Tim Hortons deal. Just as I was finish it up I see new headlines flashing about a Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) involvement in the financing of the merger to the tune of $3 billion. So I've added this section.

I hate to appeal to authority, but this little piece of news give me extra strong conviction in the deal being a success, as the managements of both companies getting Buffett's seal of approval. Sure, it looks like it will be a preferred debt deal that doesn't carry with it much financial risk to Berkshire Hathaway, but anybody who knows Buffett knows the number one risk and consideration at stake for him isn't money but his reputation. He wouldn't bless the merger with financing if it didn't make sense to him.

One little tidbit of interest is Berkshire owns Heinz. Heinz is the supplier of ketchup to Burger King. Buffett and Berkshire probably have access to some unique aspects of Burger King in terms of statistics and trends, through that supply chain, that the general public doesn't have.

While the exact details have yet to be disclosed, it was reported that Berkshire's $3 billion investment would only be 25% of what is needed. It sounds like Berkshire isn't the only big money confident in the deal, especially when it means Berkshire probably won't have a lot of control.

On a side note, many writers and commentators have been pointing out that the merger could help use Burger King's U.S. expansion expertise to help Tim Hortons do its expansion. I'll raise it one more - Burger King lately has been all about international expansion. For example, it plans to go from 0 to 25 Burger Kings in France this year with an eventual target of between 350 and 400 in the next 10 years.

There is a whole world out there, literally, for Tim Hortons to potentially expand and having Berkshire as an ally can only help that happen. And who knows - maybe Berkshire will end up owning Tim Hortons and Burger King down the road.

Source: Is It Time To Wake Up And Smell Burger King's New Coffee?