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Tim Hortons-Burger King deal finalized, with Warren Buffett on board (+video)

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(Read caption) Buffett, Burger King, and Tim Horton: A Sweetheart Deal?
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Editor's Note: This story has been updated with comments Burger King CEO Daniel Schwartz.

It's official. Burger King and Tim Hortons are combining to make the world's third largest quick-service retailer. 

Burger King will buy Tim Hortons, the Ontario, Canada-based coffee and donut chain, for $11 billion. The combined firm will have 18,000 restaurants in 100 countries and an estimated $23 billion in sales. 3G Capital, Burger King's parent company, will own 51 percent of the new company. But you needn't worry about changes to your Whopper or favorite cup of coffee – the two restaurants will continue to be managed as independent chains. 

"By bringing together our two iconic companies under common ownership, we are creating a global [fast-food] powerhouse," Alex Behring, executive chairman of Burger King, said in joint statement by the two companies Tuesday morning. "Our combined size, international footprint and industry-leading growth trajectory will deliver superb value and opportunity for both Burger King and Tim Hortons shareholders, our dedicated employees, strong franchisees, and partners. We have great respect for the Tim Hortons team and look forward to working together to realize the full potential of these two extraordinary businesses."

In the deal, Burger King will move its tax residence to Canada, thus avoiding high US corporate tax rates through a legal method known as corporate inversion. In the statement about the deal, Burger King said it is moving to Canada because the country "is the largest market of the combined company." As the Monitor wrote in an explainer about corporate inversions Tuesday:  

Corporate inversion is when an American company reincorporates overseas by having a foreign company buy its assets. If a company is based in the US, the company can owe up to 39.1 percent on its domestic and foreign profits. But if they move to say, Ireland, they only pay Ireland's 12.5 percent corporate tax rate ... The US corporate tax code is riddled with exceptions and companies use various strategies to lower their taxes. Burger King's overall effective tax rate was 27.5 percent last year. Nevertheless, over the past three decades, 52 companies have used corporate inversion, according to Reuters. The practice has become more common in recent years: Twelve companies have left the US since 2012, including five in 2014, and another eight are planning to do so next year, according to Bloomberg. Fortune has compiled a list of recent tax avoiders

In a conference call with the media Tuesday, Daniel Schwartz, CEO of Burger King, rejected the idea that the merger was a corporate inversion, saying the deal was made to help the both companies expand. He said they chose to move the headquarters to Canada because that is where most of the business is. He noted that Burger King will continue to be managed out of its current offices in Miami. 

"Tax wasn't the driver of the deal," Mr. Schwartz said. "We pay a tax rate in the mid-20s, which is around the same as Canada. We don't expect there to be meaningful tax savings from the move."

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Though the tax rates are similar, there is a big difference– the US is one of the few countries in the world that taxes companies for profits made worldwide. In Canada, however, Burger King will be taxed only on profits made in Canada, which saves the company money by reducing its tax burden on global profits.

"[N]either Hortons nor Burger King will reduce their taxes on their Canadian or US businesses as a result of the transaction," said Kent Wisner, an adjunct professor at the University of California, Berkeley Law School, in an email. "The opportunity is for lower taxes on non-US and non-Canadian businesses in the future."

Warren Buffett's equity firm Berkshire Hathaway is providing $3 billion to help finance the deal. Mr. Buffett announced Tuesday that Berkshire Hathaway will pay the US corporate tax rate on any money it earns from being a passive equity investor in the deal. 

Per the terms of the merger, Tim Hortons shareholders will get $65.50 (US$59.71) and .8025 in common shares of the combined company.

"As an independent brand within the new company, this transaction will enable us to move more quickly and efficiently to bring Tim Hortons iconic Canadian brand to a new global customer base," said Marc Caira, president and CEO of Tim Hortons. "At the same time, our customers, employees, franchisees and fellow Canadians can all rest assured that Tim Hortons will still be Tim Hortons following this transaction, including our core values, employee and franchisee relationships, community support and fresh coffee."


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