When Tim Hortons Chief Executive Marc Caira announced a sweeping plan in February to rejuvenate the iconic coffee chain, he talked about making the company bolder and “more daring.” Not long afterward, Burger King executives approached him with a different idea: a takeover.
The merger talks began late in the winter with a casual conversation between Mr. Caira and representatives of 3G Capital Group, a private equity fund based in Brazil that controls Burger King. 3G bought the U.S. fast food chain in 2010 for $4.1-billion (U.S.) and it had long coveted Tim Hortons, intrigued by its steady sales growth at restaurants across Canada. Not to mention the claim that an astounding 75 per cent of all coffee bought at fast-food restaurants in Canada comes from Tims.
Mr. Caira, who has been at Tim Hortons for just more than a year, felt his strategic plan was showing signs of success. Entitled “Winning in the New Era,” it called for the company to address “low-growth” in North America by enhancing its expansion in maple-glaze-doughnut-saturated Canada, aggressively competing in what it called the “must-win” U.S. market where it has struggled, and opening stores overseas. Results were improving both in Canada and at many of the company’s more than 800 restaurants in the U.S.
“For me the real challenge was, is there a way for me to do what I need to do, but do it faster,” Mr. Caira said in an interview Tuesday. “And that’s where Burger King comes in to play. This is where 3G comes into play.”
The casual discussions soon evolved into serious negotiations with deal makers using code names: “Red” for Tim Hortons and “Blue” for Burger King. The talks went round the clock over the last few days, culminating in Tuesday’s announcement of a $12.5-billion takeover, including $3-billion (U.S.) in financing from superstar investor Warren Buffett.
“Over a period of months, we came to the conclusion that we were better off to align ourselves with a fantastic partner like Burger King and 3G in order to really take advantage of their infrastructure and drive this business forward,” Mr. Caira said.
What Mr. Caira, a veteran food industry executive who spent 36 years with global giant Nestlé SA, saw in 3G was a “very young … very dynamic, very aggressive company” with a track record at Burger King. “I felt very comfortable after I met with our friends a number of times that this was a long-term marriage that could be beneficial to both parties,” he said.
Burger King’s 34-year-old CEO, Daniel Schwartz, has also only been in his office since last year. But he has quickly earned a reputation for surrounding himself with a young executive team and taking a hatchet knife to costs. In the last year he has slashed operating costs by nearly 50 per cent, sold roughly 500 company restaurants to franchise owners, unloaded the corporate jet and cancelled a lavish annual party held by the company’s European brass. The tough measures have bred financial rewards, with profits and sales climbing.
Now if the Tim Hortons deal is approved, Mr. Schwartz will be group CEO, making him the ultimate boss of a brand considered so much a part of Canada some enthusiasts have tattooed the logo on their bodies.
Mr. Schwartz said he is very familiar with Tim Hortons.
“I spend most of my time travelling and visiting restaurants around the world and in the U.S.,” he said in an interview with The Globe and Mail. “I can say that I have had my fair share of double-doubles on the road long before this deal came to fruition.”
Both sides say the restaurant chains will be run separately and the deal will not involve tinkering or mixing formats, such as offering Tim Hortons coffee at Burger King. Rather, Tim Hortons hopes to use Burger King’s expertise to succeed in the U.S. and expand into new markets around the world. The American burger chain, No. 2 to McDonald’s, is in 98 countries.
The model appears something similar to Louisville, KY-based Yum Brands, which owns Taco Bell, Pizza Hut and KFC, and operates all of them for the most part as separate brands. China is now Yum’s No. 1 market.
In Canada, some fretted that a chain they see as a national institution was once again in foreign hands, as it was from 1995 to 2006 when it was owned by Wendy’s International. In the U.S., questions swirled around the fact that the deal was a “tax inversion,” a structure that would see the new combined entity incorporated in Canada where corporate tax rates are lower. While that doesn’t make much difference now, as Burger King and Tim Hortons pay about the same level of taxes, it could be a factor in future if the new company continues to expand. In the U.S. profits generated overseas are taxed at the 35 per cent rate, whereas Canada generally allows profits earned outside the country to be moved back tax-free (the assumption being that the company already paid tax in the foreign jurisdiction).
In conference calls Tuesday with reporters and investors, Mr. Schwartz and 3G executives repeatedly said the takeover was not about tax benefits. Mr. Schwartz stressed the deal was really about taking Tim Hortons, already staggeringly successful in Canada, to the world stage.
“We’ve known that this has been quite a gem of a company and just a phenomenal brand for some time now,” he told The Globe. “When you add on top of that the ability to plug Tim Hortons into the global growth network and development network that we’ve established at Burger King, that’s kind of the icing on top of the cake.”