Burger King aims for whopper of a deal

An employee prepares a bag containing a customer's food order inside a Burger King fast food restaurant in Moscow, Russia, on Friday, April 5, 2013. McDonald's, which virtually created the market for burgers and fries in the country and convinced Russians it's OK to eat with their hands, must fend off a growing challenge from rivals Burger King Worldwide Inc., Subway Restaurants, Yum! Brands Inc. and Wendy's Co. Photographer: Andrey Rudakov/Bloomberg
An employee prepares a bag containing a customer's food order inside a Burger King fast food restaurant in Moscow, Russia, on Friday, April 5, 2013. McDonald's, which virtually created the market for burgers and fries in the country and convinced Russians it's OK to eat with their hands, must fend off a growing challenge from rivals Burger King Worldwide Inc., Subway Restaurants, Yum! Brands Inc. and Wendy's Co. Photographer: Andrey Rudakov/Bloomberg

Burger King Worldwide Inc., the second-largest U.S. hamburger chain, is in talks to buy Tim Hortons Inc. and move its headquarters to Canada, becoming the latest American company seeking to relocate to a lower-tax country.

Burger King would create the world's third-largest fast-food chain by merging with Canada's biggest seller of coffee and doughnuts, the companies said in a statement. The Canadian corporate tax rate is typically 26.5 percent, compared with 40 percent in the U.S., according to auditing and tax firm KPMG.

The deal renews debate over American companies shifting their headquarters internationally in search of lower corporate tax bills. President Barack Obama criticized the trend last month, and his aides said the administration would take action to curtail the practice.

"There's some modest political risk to the deal, but it's difficult to say because we haven't seen the administration move to block one of these yet," said Will Slabaugh, an analyst at Stephens Inc.

The proposed deal would give Burger King access to a coffee brand with a cult following and potentially help breakfast sales. Burger King now sells coffees under the Seattle's Best name, which is owned by Starbucks Corp. Tim Hortons also would let Burger King get into the grocery business by selling packaged coffees at supermarkets in North America.

3G Capital, which has a 70 percent stake in Miami-based Burger King, would own the majority of the shares of the new company, according to the statement. The two businesses will operate as stand-alone brands, though there may be supply-chain cost savings from combining them.

3G was co-founded by billionaire Jorge Paulo Lemann, Brazil's richest person. The firm's managers have gained a reputation by squeezing costs out of the companies it acquires, Slabaugh said.

"These guys are known for making some very smart financial moves," he said.

3G, which teamed up with Berkshire Hathaway Inc. last year to buy H.J. Heinz Co., has made cost cutting a priority at the ketchup company. Heinz embarked on a plan to fire more than 1,000 workers and close plants in North America, though a group of Ontario investors said in March that they would keep open the Canadian tomato-juice factory.

In Burger King's case, the new combined business would have about $22 billion in sales and more than 18,000 restaurants in 100 countries. The deal is subject to negotiation, and Burger King and Tim Hortons don't plan to comment further until an agreement is reached or discussions are discontinued, according to the statement.

Between mid-June and late July, when Obama began criticizing deals that cut taxes by relocating outside the U.S., at least five large American companies have announced plans to make such a move -- known as an "inversion." That includes AbbVie Inc. and Medtronic Inc.

Since the start of 2012, at least 21 U.S. companies have announced or completed the deals, comprising almost half the total of 51 such transactions in the past three decades.

Burger King already pays a rate below 40 percent, the result of operating in a mix of tax jurisdictions. Its effective tax rate in 2013 was 27.5 percent, the company said in a filing. Still, the rate may eventually creep up toward 35 percent without the inversion, Slabaugh said.

White House spokesman Josh Earnest said Monday that he wouldn't comment on specific actions by any company. He repeated previous administration statements that the Treasury Department is looking at potential changes in rules to make tax-inversion deals "less appealing."

"Companies that consider actions like an inversion continue to benefit from all of the resources of the United States," Earnest said at a briefing in Washington. "It's not fair for them to just fill out some paperwork that would allow them to just renounce their citizenship" to lower their tax rate.

Earnest said Obama's goal remains getting Congress to pass legislation to rework business taxes. Saying that getting that done will "take some time," he said Congress in the interim should approve stand-alone legislation to prevent inversions.

Tim Hortons, which has about 4,500 restaurants, is expanding its product lines to improve sales. The Oakville, Ontario-based company posted results this month that beat estimates and said fiscal 2014 profit will top or be at the high end of its target range.

Information for this article was contributed by Matt Townsend, Eric Lam Roger Runningen and Angela Greiling Keane of Bloomberg News.

Business on 08/26/2014

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