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Sunday, 23 November 2014

Where’s the beef

Buffett and tax outrage both diversions in BK deal

Warren Buffett’s name is giving Burger King’s deal to buy Tim Hortons, now worth some $11 billion, a public relations boost. But some commentators on Twitter are calling the Berkshire Hathaway boss a hypocrite and branding him unpatriotic for supporting a company moving from the United States tax jurisdiction to Canada. Both sentiments are diversions.

The Sage of Omaha is lending Burger King $3 billion in the form of preferred stock at a lucrative 9 percent interest rate. He is once again backing BK’s majority owner 3G Capital, the Brazilian private equity group which bought Heinz last year for $28 billion with his financing help. But Buffett’s imprint tells regular investors in Burger King and Hortons nothing. There’s no vote of confidence in either company’s common stock, and no Buffett management stardust being spread, either.

He also lent money during the financial crisis to Goldman Sachs, Bank of America and General Electric among others. Amidst deep market gloom about banks, his investments carried the valuable message that he thought the companies would survive. But investments in Heinz, before that in Wrigley alongside Mars, and now in the Burger King acquisition of Hortons are just profitable uses of a few billion of Berkshire’s spare cash.

And although the new parent company of Burger King and Hortons will be based in Canada, the perceived tax inversion – a mechanism much in the news lately by which U.S. companies change domicile to lock in lower tax rates – really isn’t one this time. The two companies have similar effective tax rates, Burger King doesn’t have mounds of cash trapped overseas, and both will operate separately under headquarters that won’t move. The company says its tax rate won’t change materially.

That means the deal doesn’t really work against what President Barack Obama called “economic patriotism” as some Twitterers claim. Rather, it’s a highly leveraged buyout by 3G of another restaurant chain. And the boost to the market value of both buyer and seller, more than $4 billion since the deal was announced, is a function of investor faith in 3G and the power of financial engineering. There’s no real endorsement from Buffett and no hypocrisy – the deal is just an LBO.

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Context News

Burger King Worldwide announced on Aug. 26 that it had agreed to buy Tim Hortons for cash and stock worth about $11 billion at Burger King’s share price by around midday the same day. The deal values Canadian Hortons at a 35 percent premium to where its stock closed on Friday, the last day before news of the deal leaked.

Berkshire Hathaway has committed $3 billion of preferred stock to help finance the deal, but will have no role in managing or operating the fast food companies.

3G Capital, a private equity firm that controls Burger King, will retain 51 percent of the combined company.

Tim Hortons will continue to be headquartered in Ontario, while Burger King will be headquartered in Miami. The two groups’ new parent company will be based in Canada.

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