Why Burger King Is A Roll-Up, NOT A Tax Inversion Deal

Sep. 1.14 | About: Restaurant Brands (QSR)

Summary

Burger King is half the size of Tim Hortons in revenues and earnings.

But its market cap is bigger.

BKW's pre-deal PE was 41, compared to 14 for Tim Hortons.

That makes this a classic roll-up deal, not a tax inversion.

Canada's National Post gives us this summary of the pertinent numbers pertaining to the proposed Burger King (BKW) merger with Canadian-based Tim Hortons (THI).

tax inversion burger king

(own highlights added)

The math is startlingly simple (and surprisingly overlooked):

Mr. Market ascribed a P/E valuation of over 41.5 to Miami-based BKW, but only around 15 to THI. The blue circles above shows how that translates to market cap.

By adding THI's $565 million in earnings, BKW will add roughly $18-20 billion (565 x 41) of market cap.

To add $20 billion in market cap, it pays $12 billion (all rough numbers).

So, it adds a net value of $8 billion -- about what it's worth before the deal.

That's as close to a textbook example of roll-up accretion you can get, the kind Mr. Buffett made his fortune on.

Burger King's tax bill in total is only around $90 million a year. The new entity will still have to pay the IRS its existing income taxes on its U.S. operations. The only savings it might get could be the U.S. tax on its foreign operations (about half).

Of course, it won't pay U.S. taxes on Tim Hortons' Canadian operations, but nobody's doing that now, so there's no real savings to be had there.

So... even if BKW were to save $30-40 million a year on taxes, that's trivial, compared to creating $8 billion in value out of thin air.

The media spin the merger as a tax inversion deal, because that's what the editors have determined the ruling narrative is these days.

Smart investors, though, realize the real value in this particular case is in the accretion, not the tax savings.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.