Warren Buffett’s Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) is set to invest $3 billion for Burger King Worldwide Inc (NYSE:BKW)’s proposed takeover of Canadian coffee-and-doughnut chain Tim Hortons Inc. (NYSE:THI) (TSE:THI) and will earn 9% annual interest on the investment.
With yields at near record lows, Buffett has shunned bets in publicly traded bonds, preferring deals in which his reputation and the size of the cash hoard facilitate Berkshire to lock in better rates compared to other investors.
Burger King’s tax inversion deal
Burger King Worldwide Inc (NYSE:BKW) announced Tuesday its plans to acquire Tim Hortons Inc. (NYSE:THI) (TSE:THI) with the combined company enjoying around $23 billion in total sales, with over 18,000 restaurants spread across 100 countries. As part of the deal, the burger chain announced that it would move part of its headquarters to Ontario and avoid paying millions in U.S. corporate taxes.
Tax inversion deals facilitate U.S. companies in paying lower tax rates by setting up offices in a country with lower tax rates. Such maneuvers have come under greater scrutiny from Senate Democrats recently. The first half of 2014 witnessed a heightened frenzy in such tax inversion deals, with nearly 50 companies announcing plans.
President Obama denounced inversion deals as an ‘unpatriotic tax loophole’. The following graph captures the surge in the tax inversion deals:
Buffett’s $3 billion investment
Earlier it was expected Warren Buffett’s Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) would provide roughly 25% of the financing for the deal and would receive preferred shares in the combined entity. In a conference call for investors, Burger King Worldwide Inc (NYSE:BKW)’s chief executive officer Daniel Schwartz disclosed that Buffett’s investment would fetch a 9% rate on the preferred stake, which compares favorably with a yield of about 8% on Burger King’s $791 million of 9.875% bonds due in October 2018.
Warren Buffett had previously injected capital into financial firms like Goldman Sachs Group Inc (NYSE:GS) and Bank of America Corp (NYSE:BAC) at times of crisis. He has also made investments in food and beverage companies with well-known brands including The Coca-Cola Company (NYSE:KO), and ice-cream chain Dairy Queen. He made 10% a year on a $5 billion preferred stake in Goldman Sachs and in a $3 billion bet on General Electric Company (NYSE:GE).
Jorge Paulo Lemann’s 3G Capital is currently the majority owner of Burger King. Warren Buffett partnered with 3G last year to buy H.J. Heinz Company (NYSE:HNZ), and he has said that he would be happy to work with them again.