Warren Buffett helps Burger King buy Canada’s Tim Hortons, flipping the inversion calculus for President Obama

08/26/2014 7:08 PM

08/26/2014 7:16 PM

Burger King Worldwide agreed Tuesday to buy the Canadian restaurant chain Tim Hortons for $11.4 billion, creating one of the biggest fast-food operations in the world — with a little help from Warren Buffett.

As part of the transaction, the No. 2 American burger giant will move its home to Canada, where the combined company’s biggest market will be.

Though Burger King’s move raised concerns about yet another company moving abroad to reduce its tax bill, the switch in corporate nationality appears more aimed at appeasing Canadian regulators wary of a foreign company buying a national icon like Tim Hortons.

Some other questions raised by the deal are whether U.S. customers will shun Burger King in significant numbers for long and whether Buffett’s participation in the deal will dent political efforts to crack down on so-called corporate inversions, which switch headquarters countries to avoid U.S. taxes.

Burger King is expected to save a little bit on taxes through the inversion, rather than enjoy a huge reduction.

Burger King pays less than the U.S. corporate tax rate because it operates in many jurisdictions. Its effective rate in 2013 was 27.5 percent, one percentage point higher than the Canadian corporate tax rate of 26.5 percent.

“We don’t expect our tax rate to change materially,” Burger King CEO Daniel Schwartz said on a call with investors Tuesday. “This transaction is not really about tax. It’s about growth.”

The combined company will have 18,000 restaurants in 100 countries and $23 billion in annual revenue. Its best expansion possibilities could be in Canada, where it will be the largest seller of both coffee and doughnuts.

The two brands emphasized that they would keep their separate identities and that Burger King would continue to be run from Miami, which might blunt consumer backlash.

Some analysts say even if some Burger King customers are initially angered by the move, the feelings could quickly fade since there wouldn’t be any significant changes in restaurants as a result of the deal. Besides, many Burger King customers who go to the chain for convenience may not care enough about the move to change their eating habits, said Jonathan Maze, editor of Restaurant Finance Monitor, which tracks the industry.

Berkshire Hathaway Inc., where Buffett is chairman, CEO and the largest shareholder, committed $3 billion of preferred equity financing for the deal, according to a statement. Berkshire won’t participate in managing the restaurant business under the deal. It will get a 9 percent annual dividend, which would be taxable income for Berkshire.

As an investor, Berkshire wouldn’t benefit directly from any tax savings at Burger King. He did not respond to a request for comment Tuesday.

His participation in the deal, however, might provide some political cover for Republicans trying to stave off the Obama administration’s efforts to crack down on inversions. Buffett has been an ally of President Barack Obama on some other economic issues, including raising taxes on the rich.

Concerning inversion, Buffett has walked a fine line.

When Pfizer was contemplating a deal that would let it shift its headquarters overseas, for example, Buffett said he would “personally change” the inversion provisions of the tax code if it were up to him.

But he also said he wasn’t attacking Pfizer for thinking about following the law as it currently stood. And at Berkshire, Buffett has a long record of working to reduce corporate taxes for his company and its holdings.

Buffett “tends to do what’s best for his money,” Jeff Matthews, a Berkshire shareholder and author of books about the company said. “And, in this case, what’s best for Berkshire’s money is getting involved in this deal.”

On the political front, White House press secretary Josh Earnest said Obama still wanted Congress to act and the administration continued to look for ways to discourage inversions. He said he wouldn’t comment on specific deals, including Burger King.

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