Tim Horton was an all-star defenseman for the Toronto Maple Leafs in the 1950s when he met Jim Charade and the two began opening hamburger restaurants. In 1964, Charade convinced Horton to open a coffee and doughnut shop.
Over the subsequent decades, that chain of coffee shops, Tim Hortons, would become a Canadian institution — with 3,600 locations that have average unit volumes exceeding $2 million and a 42 percent share of the country’s total quick service market, according to Securities and Exchange Commission documents.
Yet it’s a different story outside of Canada, where Horton the hockey player and Tim Hortons the chain are each largely unknown. The brand has less than 900 locations in the U.S., and very few anywhere else.
“There are 3,600 Tim Hortons in Canada,” said Douglas Fisher, president of FHG International, a foodservice-consulting firm in Toronto. “Logically, there should be 36,000 in the U.S. But they’re not getting that type of traction in the U.S. at all.”
That reality is reason enough to explain why Burger King Worldwide Inc. stepped up to pay $11.4 billion for Tim Hortons Inc. this year. The chain has yet to crack the code on international development, giving Burger King’s controlling shareholder, investment firm 3G Capital, plenty of room to recoup that investment.
The deal was finalized on Friday, and on Monday the two companies began operating under a single entity, now called Restaurant Brands International (RBI), with an overhauled executive team.
Daniel Schwartz, Burger King’s chief executive, will be CEO of RBI. Elías Díaz Sesé will be president of Tim Hortons and José Cil will be president of the Burger King brand. Sesé had been president of Burger King Asia Pacific, while Cil oversaw the brand’s development in Europe, the Middle East and Africa.
3G Managing Partner, Alex Behring, will be chairman, and Marc Caira, who had been CEO of Tim Hortons, will be vice chairman.
“We want to preserve the brand’s presence in Canada, where it is the market leader,” Schwartz said in an interview Monday. “We want to accelerate the pace of growth in the U.S., and we want to take this great, iconic brand around the world.”
Long negotiations
The acquisition has its roots in a decision early in 2013 by the Burger King board to consider acquisitions of other concepts, according to SEC filings. The company ultimately decided to target Tim Hortons, and in March of this year the Omaha investor Warren Buffett backed the deal in a conversation with Behring.
Over dinner in Toronto on March 20, Caira told Behring that Tim Hortons wasn’t for sale. Yet Burger King persisted with three formal offers over the next three months.
It wasn’t until Burger King gave several assurances that it would protect the Tim Hortons brand and its Canadian heritage that the board at Hortons started to negotiate. It would take another three months before those directors agreed to sell the chain to Burger King and its controlling investor, 3G.
Those assurances included basing the combined company in Canada, running Tim Hortons separately, and not raising rents or royalties on the Tim Hortons franchisees for at least five years. They also agreed to maintain significant employment levels in Canada. Those assurances were all key to the board’s decision to pursue the deal, according to SEC filings.
Those assurances would also help the deal win approval from Canadian regulators earlier this month. Burger King agreed to maintain a “significant” number of employees in Oakville, Ontario, where Tim Hortons is based.
Perhaps more interestingly, Canadian regulators got Burger King to agree to accelerate its plans for international development of the Tim Hortons brand.
International focus, U.S. runway
Burger King probably didn’t need much convincing. 3G Capital bought Burger King in 2010 for $4 billion in part because it saw vast potential in the chain’s international development. Since that time, Burger King’s international presence has increased by nearly 50 percent, from 4,358 units before 3G took over to more than 6,200 earlier this year. U.S. development has largely been stagnant over that time.
And it’s clear that Tim Hortons will be focused on international growth under 3G Capital, particularly in the Asia Pacific (APAC) region. Sesé helped Burger King triple its annual growth rate while running the APAC market.
“There’s no reason the rest of the world shouldn’t experience Tim Hortons’ great coffee,” Schwartz said. “We want to take an aggressive development approach internationally, with partners in key countries to accelerate the pace of Tim’s growth around the world.”
Many observers believe that 3G will be able to realize the full potential of Tim Hortons in international markets.
“I see it as a good thing,” said Steve Crichlow, principal at Compass Restaurant Consulting and Research. “In three short years, they’ve tripled the value [of Burger King]. You have to think they’re going to do something similar with Tim Hortons.”
Indeed, going into the deal, Burger King’s market capitalization was nearly $12 billion, triple what 3G paid for the chain.
That value increase didn’t just come from international development. The company also sold all but 52 of its company-owned restaurants to franchisees and ruthlessly cut costs to boost profits. To wit: Burger King’s net income nearly tripled between 2011 and 2013, from $88.1 million to $233.7 million, even though revenues during that time were cut in half, from $2.3 billion to $1.1 billion. That revenue decrease was mainly the result of refranchising efforts.
Crichlow believes that Burger King could use its existing base of franchisees to develop Tim Hortons more rapidly in the U.S. “I could see them going to larger, long-time franchisees and saying, ‘I see your market is maxed. We will cut you a deal if you start doing Tim Hortons,’” he said.
Indeed, said Schwartz: “Give us some time. In the next few years, the one thing you can be sure you’ll see is more Tim Hortons” in the U.S.
The brand’s business model should make the development relatively easy. The products are made off site, meaning that the chain doesn’t need huge sites for its locations. “They can put these anywhere,” Fisher said. “They can go into the smallest spaces and generate huge numbers.”
Tax rate and cost cuts
In the U.S., much of the focus on the deal has been on keeping Restaurant Brands’ headquarters in Canada in a so-called tax inversion deal that could help the company save on its tax bill. The interest group Americans for Tax Fairness estimated last week that the company would save $400 million to $1.2 billion on taxes between 2015 and 2018. Company executives, for their part, have insisted in multiple reports the company’s tax rate won’t change.
In Canada, there was trepidation over cost cuts. The Canadian Centre for Policy Alternatives, a Canadian think tank that pushed against the deal, estimated that Tim Hortons could lay off as many as 700 people after the merger, but that runs counter to Burger King’s deal agreement with Tim Hortons to maintain significant employment levels in Canada.
That would be on track with Burger King and other acquisitions like H.J. Heinz Company. At Burger King, for instance, the company cut staff at its Miami headquarters and cut its corporate aircraft and other executive perks.
With Tim Hortons, Burger King and 3G get a very profitable business. Hortons controls every aspect of the system in Canada. It makes food and sells it to franchisees. It also controls the real estate and charges the operators rent. Thus, Tim Hortons generates three times the revenue that Burger King generates.
Fisher cautioned that the chain should tread carefully about cutting support to those operators because that support helped the system work so well in Canada “It’s the No. 1 company in the country,” Fisher said. “That maniacal control of the business is part of what made the business so successful.”
Still, while it may seem like Burger King had to navigate a difficult road to secure the acquisition of Tim Hortons, including fears from people on both sides of the border, Schwartz said he doesn’t think it is much different than any other acquisition. Any other big acquisition, that is.
“Any large transaction has its own complexities,” he said. “We announced the transaction over the summer. We laid out all of the steps. We achieved all of the steps. We’re happy to close the transaction and get back to the business of operating restaurants.”
Contact Jonathan Maze at [email protected].
Follow him on Twitter at @jonathanmaze