Tim Hortons + Burger King = ??? Burger Bits ???

When you think of Canada [IF I think of Canada. Ed.], you think of Mounties, maple leaves and... Tim Hortons. Like Canadian Tire and the Montréal Canadiens, Tim's is a Canadian icon, but without "Canadian" in the name. Its 1000s of stores spanning the Great Not-so-white North sell (mostly) coffee and donuts, and buying a "double double and a box of Timbits" is part of your average Canuck's everyday life. See Walt's "Field guide to Canadian donuts".

This morning, however, Canadians are in a maple-flavoured tizzy over merger talks between Tim Hortons and... wait for it... Burger King! [Really? Ed.] Yes, really. [But didn't Tim's get in bed with Wendy's a couple of years ago, with disappointing results for both? Ed.] That's true, and you'll still find Tim Hortons and Wendy's stores side-by-side in many Canadian cities, but this is going to be different -- a really really good deal with both companies. [Please don't use the word "blockbuster". Ed.]

OK, Walt will explain. Tim Hortons is a Canadian company, with headquarters in beautiful downtown Oakville ON. It has something like a 95% share of the coffee-and-donut biz in the GNN, with nowhere to grow except into the USA, where it's making steady but slow progress in the northeastern states.

Burger King is a much bigger US corporation, based in Miami, running second or worse in the race to sell more whoppers to the American public. Worse, many Americans have finally realized that tipping the scales at 300+ pounds is unhealthy, and sales of burgers and fries are starting to slip, even at McD's.

Will this whopper of a deal [Don't do that again. Ed.] help Tim's and or BK to grow their businesses and profits? Wouldn't a complete merger give us "burger bits" -- a company that is about neither burgers nor coffee and donuts -- to the detriment of both brands?Seems they've thought about that, and are planning to merge only the holding companies, leaving Burger King and Tim Hortons as standalone brands. The new company would become the world's third-largest fast food chain, with more than 18,000 locations and sales of about $22 billion.

So what's the deal then? Aha! Turns out it's a tax inversion play, bad enough (from the US perspective) to get the Prez annoyed. A CBC business commentator explained that the US corporate tax rate is about 35%, while Canada's is only 26%. By merging with a Canadian company and setting up a head office in Canada, American companies can achieve significant tax savings, said Michael Hlinka. "You've got to merge with a company one-quarter your size, then you can technically set up your headquarters in Canada, even though you still keep everybody in the United States. It's almost like a mailing address more than anything else."

There's more to it, of course. Mr. Hlinka thinks Burger King may also be trying to keep pace with their nemesis, Mickey D's. "McDonald's has become very serious about making a good cup of coffee in the past several years and Burger King hasn't really stepped up, so maybe this is how they're going to compete with McDonald's globally," he said.

As for Tim's, Mr. Hlinka said, "If Tim Hortons gets its coffee into all those Burger King stores worldwide, that would be absolutely huge for it, and I think that might be part of this strategy as well." However, he doesn't believe a Burger King-Tim Hortons merger would mean big changes for the customer picking up his daily double-double. He said Burger King would be unwise to tinker with Tim Hortons successful model.

"Tim Hortons just had fantastic [earnings] results, they're making money, they're expanding their offerings, they're doing a lot of things right on the execution end," he said. "This company just has this incredible momentum behind it that just makes the company work. It's worked for the past 45-50 years, it's going to be with us for another 45 or 50.

"If you go through some of the underground food courts, there will be a lineup at Tim Hortons that will stretch seemingly around the block, meanwhile there's five other places selling coffee and people are just like, 'No, I'd rather wait for the Tim Hortons coffee.'"

Quick! Get your broker on the phone! Buy 40,000 shares!