The Burger King Worldwide Inc.-Tim Hortons Inc. tie-up has already drawn heat for its implications for the United States as a tax inversion strategy, but there's plenty to like about the deal – especially if you're a Tims shareholder.
Tims wasn't cheap before, trading at around 17 times price to earnings, which J.P. Morgan analysts, in a Aug. 7 report, said was "slightly above the longer-term 16-17x we believe is appropriate" for a quick-service restaurant chain. That didn't stop Burger King and its owners, Brazilian private equity firm 3G Capital, from paying a significant premium above the recent share price. The announcement characterized the premium for the cash and shares combination offer ($65.50 cash, 0.8025 shares in the new company, per THI share) as 39 per cent above Tims' 30-day volume-weighted average price on Aug. 22. (They can also take either $88.50 in cash, or 3.0879 common shares of the new company, pro rata.) 3G apparently isn't afraid to pay rich prices for their targets – in 2010, they bought Burger King itself for a nearly 46-per-cent premium.
To pay for the deal, Burger King is borrowing $12.5-billion (U.S.) for the cash portion of the offer, which the announcement said expected to take the form of a "$6.75-billion senior secured term loan B facility, a $500-million senior secured revolving credit facility and senior secured second-lien notes in the amount of $2.25-billion." Warren Buffett's Berkshire Hathaway is putting up $3-billion of preferred shares, though the announcement insists they're not going to be involved in operations.
In a question to Burger King CEO Daniel Schwartz, TD Securities' Michael Van Aelst, described the new company's leverage as around 7 times; Mr. Schwartz disputed that, saying that the Berkshire Hathaway financing is "not exactly" leverage and that it would be more like 5 times, which is "consistent" with the company's peers that are largely composed of franchises rather than centrally-owned restaurants. The executives on the call repeatedly stressed the high cash-flow of the quick-service restaurant industry as driving the speed of paying down the debt.
Again, 3G is comfortable with debt, especially where Mr. Buffett is involved. In last year's $23-billion (U.S.) bid for Heinz, Moody's calculated that the new company's last 12 months leverage was 10.4 times including the preferred stock issued to Berkshire Hathaway, and 6.7 times without.
The executives emphasized on the call that the tax savings of moving Burger King's headquarters to Canada are not the main driver for the deal, and if you doubt them, it's worth examining the elegant explanation of why from Bloomberg View's Matt Levine. Maybe it really is about growth after all.