The Wall Street Journal reports that Burger King is pondering an acquisition of Canadian coffee/donut chain Tim Horton's. The newspaper reports that the firms may be pursuing "a so-called tax inversion and move the hamburger seller's base to Canada." Recently, tax inversions have been on the rise, as firms establish headquarters overseas in an attempt to lower their overall tax burden. The newspaper reports, "A move by Burger King to seal one is sure to intensify criticism of them, since it is such a well-known and distinctly American brand." I found that sentence particularly funny, given that Burger King has been owned by a foreign company in the past! Diageo, the UK-based producer of alcoholic beverages such as Guinness, Smirnoff, and Johnnie Walker, owned Burger King until 2002.
Putting aside the political debate about tax inversions, let's take a look at whether this deal makes strategic sense. Are there sufficient synergies to justify a deal between Burger King and Tim Horton's? I'm skeptical. Why? For years, Wendy's - a primary competitor to Burger King - owned the Tim Horton's chain. Under investor pressure, they ultimately divested the coffee/donut chain. Why? Investors argued that the sum of the parts exceeded the whole. In other words, Tim Horton's was more valuable on its own than as a part of Wendy's. Given that history, what makes us think that Tim Horton's will now be more valuable as part of Burger King than it is on its own? I believe that management at Burger King will have to make this case to persuade investors and other analysts/observers that this deal makes sense.