Warren Buffett's back in the news again. Buffett -- well, his firm Berkshire Hathaway, to be specific -- agreed to help finance Burger King Worldwide's (NYSE:BKW.DL) purchase of Canadian coffeehouse Tim Hortons (NYSE:THI.DL). Specifically, the company of "The Oracle" is investing in preferred shares with a 9% coupon. And while much has been discussed from the political angle, much less ink has been spilled about the competitive landscape for fast food.
Ah, the politics...
Before we begin, perhaps it's apt to discuss the political angle because, well, everybody else is doing it. Mr. Buffett has been rather outspoken about taxes. Specifically, he argues in favor of individuals in higher tax brackets paying more to reduce our growing debt.
By buying a Canadian company and "reincorporating" there -- mostly in name only -- Burger King can lower its tax bill due to Canada's lower corporate tax rates. So, the prevailing argument that Mr. Buffett should abstain from this potential tax inversion deal makes sense in a rudimentary, "gotcha politics" type of way.
However, just like the Wall Street pension fund manager who argues against public pensions, or the executive who rails against government spending while submitting contracts to the government, Mr. Buffett's responsibility as the CEO of Berkshire is to its shareholders. As such, if he feels there's a deal to expand Berkshire's value, he should follow through regardless of his personal feelings.
Now the deal
Berkshire Hathaway agreed to pay $3 billion of the $11 billion price tag. Investment manager 3G Capital agreed to pay a little more than $1 billion, and JPMorgan and Wells Fargo are also going to help underwrite debt for the acquisition. Berkshire chose preferred stock rather than debt or common stock.
For those not familiar with preferred stock, think of it as a middle ground between bonds and common stock -- what most individuals know as stock. From a value standpoint, preferred stock assumes many characteristics of bonds: They're usually priced to yield a certain amount, in this case 9%. Preferred stock investors typically care about interest rates and the ability of the issuer to pay, more than the earnings growth concerns that common stockholders have.
According to the Wall Street Journal, there's a reason why Burger King took this financing method. Burger King has been a revolving door between a public company and a private equity-owned business. In many cases, private equity seeks to increase returns by leveraging the company (i.e., load it with debt).
Right now, the company has a long-term debt-to-equity ratio of two, before this large increase. By structuring the deal with preferred stock instead of debt, the potential for Burger King to keep its investment-grade rating is higher.
Tim Hortons is a good deal for Burger King
Unknown by wide swaths in the U.S., Tim Hortons is a staple in many parts of the northeast, and in its home country of Canada. It's a good pickup for Burger King; if anything, one wonders why Tim Horton's didn't fight the buyout. For perspective, last fiscal year, Tim Hortons brought in nearly three times the amount of revenue than its future parent. And it's growing: Tim Hortons grew revenue 7.5% from 2010 to its last full-year report.
The acquisition has the potential to compete with Starbucks and Dunkin' Brands in the U.S. if Burger King focuses on Tim Hortons' expansion, as its signature item is coffee. In addition, look for Burger King to compete with McDonald's McCafe selection with the new brand by gaining economies of scale with coffee by both companies.
As previously mentioned, much has been discussed from the political angle, but not much from an investing standpoint. Long story short, Berkshire Hathaway shareholders can rest assured that Buffett and company are looking to put their money and assets to work.
As far as restaurants are concerned, Burger King gets a better-performing acquisition, and Starbucks, Dunkin', and McDonald's have some possible competition if Burger King can execute.