Tim Hortons is in talks with Burger King about a merger that would create one of the world’s largest fast-food chains with 18,000 restaurants worldwide and $22-billion (U.S.) in sales.
Both companies announced late Sunday that they are in discussions to create a new holding company based in Canada, adding that the move would create the third-largest quick-service restaurant provider in the world. The companies said both brands would operate as standalone brands.
Shares in Tim Hortons rose by 20 per cent to more than $82 (Canadian) on the Toronto Stock Exchange in late morning trading on Monday. The shares began trading in 2006 at $27, after being spun off by U.S. burger chain Wendy’s International Inc.
“A key driver of these discussions is the potential to leverage Burger King’s worldwide footprint and experience in global development to accelerate Tim Hortons growth in international markets,” Tim Hortons said in a statement.
“3G Capital, the majority owner of Burger King, will continue to own the majority of the shares of the new company on a pro forma basis, with the remainder held by existing shareholders of Tim Hortons and Burger King.”
The deal would be structured as a so-called tax inversion, the Wall Street Journal reported Sunday, citing people familiar with the matter.
The sale of Tim Hortons, a popular and ubiquitous Canadian corporate status symbol, would cross business, political and cultural lines, with potentially huge ramifications. The franchise opened its first restaurant in Hamilton in 1964.
Tim Hortons CEO Marc Caira set out his five-year strategic plan for the chain in February, aiming to expand its restaurant base and spur customers to spend more during each visit to narrow the gap between what customers spend compared with McDonald’s and Starbucks.
Based in Oakville, Ont., the company is well-known for its coffee, a high-margin area where U.S. fast food giants have raced to grab market share.
A deal between the two companies could be struck soon, although details on timing remain unknown, one of the Journal’s sources told the paper.
Desjardins Capital Markets Keith Howlett, who rates Tim Hortons share a “buy,” said the proposed merger was a surprise. But he said the combination of the two companies is positive for Tim Hortons because it should help the coffee and doughnut expand internationally and gain sales in some of the 98 countries in which Burger King operates.
Queen’s University business professor Ken Wong said a merger could have a “huge upside” for both companies, if managed properly.
“It isn't a slam dunk but it has all the makings,” he said. “Beyond the obvious benefits of scale and tax savings, the deal offers some interesting possibilities. First, if Tim Hortons coffee suits the U.S. palette, this offers Tim Hortons a new approach to expanding its U.S. sales – one of the original sources of excitement when Tim Hortons stock became available, but an area where Tim Hortons has had very mixed results.
Professor Wong said it would be a “huge mistake” to market the companies under a unified brand.
“If it isn't broken, why fix it? There could be some cross promotions but, each has some form of meal offerings in their own right. And no, I don't think you'll see Tim Hortons selling fries and burgers,” he said.
Lin Ai, an economist with the Conference Board of Canada who specializes on the food industry, said it is not clear either company would gain marketing advantages from a merger.
Mergers can save costs on the purchases of food, advertising and rent. But unless the two brands complement each other, sharing a location might not pay off, Ms. Ai said in an interview.
“Tim Hortons in our view is more of a coffee and snack company, and Burger King has a totally different line of products,” said Ms. Ai, pointing to Yum Brands’ KFC and Taco Bell as merged food brands that operate well side by side.
The fast food business has recovered faster than much of the restaurant sector after the 2009 recession as budget conscious consumers returned. But sellers of burgers and fries are facing more competition than ever, from everything from food trucks to chains that offer so-called fast casual dining or healthier meals.
Ms. Ai notes Burger King has lagged larger rivals McDonald’s and Wendy’s in upgrading its menu to reflect rising consumer demand for healthier fare. And she said McDonald’s has spent billions renovating its restaurants to present a more upmarket face.
Tim Hortons’ second-quarter results beat analysts’ estimates: The company’s profit was flat at $123.8-million, although its share profit rose to 92 cents from 81 cents. Revenue rose 9.3 per cent to $874.3-million and the company’s same-store sales – a key measure of retail health – were its strongest since 2012.