How Wendy’s Gifted Burger King Worldwide, Inc. a Lower Tax Bill

Burger King is eyeing Tim Hortons and possibly a corporate inversion.

Aug 25, 2014 at 7:00PM

Canada may become the new "Home of the Whopper" if Burger King Worldwide (NYSE:BKW) is able to pull off a deal to acquire Ontario-based Tim Hortons (NYSE:THI). Shares of both stocks opened higher on Monday after confirming that Burger King was in fact in talks to acquire the popular Canadian coffee and doughnuts chain.

This wouldn't be the first stateside burger flipper to have its hands on Tim Hortons. Wendy's (NASDAQ:WEN) owned the chain before deciding to spin it off eight years ago. Wendy's has gone through a few dance partners over the years, and between Arby's, Baja Fresh, and Tim Hortons it seems as if Wendy's never knows who should do the leading on the dance floor.

The new twist here -- and likely the reason for the potential buyer's stock moving higher -- is that Burger King may choose to take advantage of a favorable tax move by moving its corporate hub from Miami to Ontario. Corporate inversions have become a political hot potato these days. President Obama called out the practice earlier this month after a pair of pharmaceuticals companies completed inversions this summer. He calls it a lack of "economic patriotism," but conservative politicians counter that the country's higher corporate tax rate relative to other nations is the root of this trend.

Canada's federal corporate tax rate was lowered to 15% two years ago. The U.K. followed three months later with a corporate tax rate of its own. Given the reluctance of many cash-rich companies with ample reserves stowed abroad to take a repatriation tax hit, the only real surprise is that more companies aren't either considering inversions or international acquisitions.

Have it your way
This is still a gamble for Burger King. Shaving corporate taxes through an inversion will naturally prop up net income, but will it anger consumers? We saw sentiment turn on drugstore chain Walgreen (NASDAQ:WBA) when it considered an inversion earlier this summer after taking a majority position in a European subsidiary. It got called out.

Jon Stewart went on to skewer inversions on The Daily Show. A few days later, Walgreen decided to stick to its U.S. home. Activists cheered. Investors bailed.

As a consumer-facing company, Burger King can't afford to upset its Whopper-gnawing public. Just as its larger rival has become the poster child for wage activism, Burger King doesn't want to see sentiment turn. It's seen the Golden Arches post negative comps during the past three quarters of activism. Burger King, on the other hand, is still growing at the store level. Does it want to become politicized?

A bigger problem here is that it's not as if franchisees will see any of the benefit. Nearly all of Burger King's roughly 13,000 locations are owned and operated by independent franchisees. They will still be paying state, local, and federal taxes. If Burger King Worldwide gets a tax break it will come from the royalties that it collects from its franchisees.

In other words, the brand may suffer more than the concept owner benefits. We'll have to see how this all plays out. Burger King's old "have it your way" slogan was brilliant, but now that there are two political sides tugging at the world's second larger hamburger chain it seems as if everyone won't be able to have it their way.

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Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends Burger King Worldwide. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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