Should Burger King Acquire Tim Horton's? Does This Deal Make Sense?

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. 

Can Burger King Be Saved?

Business Week reports that we will have yet another change in ownership structure for Burger King.   According to the magazine, "Now, merely 18 months after the venerable Home of the Whopper was sold to buyout shop 3G Capital, it is again returning to a stock market listing by taking over the ticker of Justice Holdings, a special purpose acquisition company owned by famed activist investor William Ackman."  Meanwhile, the chain continues to struggle.  McDonald's has done a tremendous job of remaking itself over the decade and driving comparable store sales growth as a result. Wendy's has become the #2 burger chain in North America.  New players such as Chipotle and Panera have taken share, while regional burger chains such as Five Guys and In-and-Out Burger have thrived.  Internationally, McDonald's and Yum Brands have done very well, particularly in places such as China. 

What happened to Burger King?   First and foremost, I think the chain suffered from the fact that it was owned by corporate parents pursuing unrelated diversification strategies for several decades.  Pillsbury owned Burger King for many years.  Then, Diageo - the alcoholic beverage company - owned Burger King during the 1990s.  Diageo essentially treated Burger King as a cash cow to finance growth in its alcoholic beverage businesses (much like rival Allied Domecq did with its ownership of Dunkin' Donuts).   Since Burger King was not the focus of either Pillsbury or Diageo, it has not received the type of strategic focus and investment required to succeed in an increasingly competitive marketplace.    Over the past decade, it has been owned by several private equity firms, but instability in ownership has been an additional challenge - two private equity firms have owned it over the past ten years, and now we are seeing yet another ownership change.  Dunkin' Donuts, of course, also was acquired by a private equity firm when Allied Domecq finally stopped pursuing its unrelated diversification strategy.   However, in Dunkin's case, the firm thrived under private equity ownership.   A renewed focus on the business led to growth and high profits, leading to an IPO.