Interesting new piece from a progressive Canadian group by Natasha Luckhardt of Canadian Centre for Policy Alternatives ‘Trouble Brewing – Why the Tim Hortons Takeover is a Bad Deal for Canadians’
For more background see the Financial Post article here.
Full article below.
Why the Tim Hortons Takeover is a Bad Deal for Canadians by Natasha Luckhardt
On August 26, Tim Hortons Inc. (NYSE:THI) (TSE:THI) and Burger King Worldwide Inc (NYSE:BKW) announced an agreement to merge the two restaurant chains. If approved, the deal will put Burger King’s Brazilian private equity owner, 3G Capital, in control of the merged company and install one 3G partner as board chair and another as CEO. To finance the acquisition, the combined company will take on C$13.7 billion in debt and preferred equity in what amounts to the largest restaurant leveraged buyout in U.S. and Canadian history.
As details emerge, it is becoming clear that the deal is troubling for our country and for fans of Canada’s coffee chain. 3G Capital has a well-established post-takeover playbook of cost cutting and mass layoffs, and the billions in new debt will create enormous pressure for changes at Tim Hortons Inc. (NYSE:THI) (TSE:THI). Furthermore, the commitments 3G Capital has made to win support for the transaction fall far short of what Tim Hortons stakeholders deserve. 3G Capital’s track record suggests that the takeover of Tim Hortons is likely to have overwhelmingly negative consequences for Canadians, including:
- Mass layoffs: 3G Capital’s obsessive cost cutting has frequently resulted in mass layoffs at the companies it acquires. Hundreds of Canadian workers at Heinz and Labatt plants have lost their jobs in recent years after takeovers by 3G Capital and its founders. Just this year, 3G Capital oversaw the closing of a Heinz plant in Leamington, Ontario, costing 740 jobs.4 If 3G Capital follows its pattern, hundreds of Tim Hortons Inc. (NYSE:THI) (TSE:THI) jobs in Canada could be eliminated. Under one estimate, the number of layoffs of Tim Hortons corporate employees could reach over 700.
- Squeeze on small-business people: Most Tim Hortons franchisees are small-business people, with the average owner operating just three or four stores.5 3G Capital has shifted substantial cost and risk onto Burger King Worldwide Inc (NYSE:BKW) franchisees and entered into preferential deals with large master franchisees. If 3G Capital applies this model to Tim Hortons, it could mean cuts in investment and services for franchisees and downward pressure on employment.
- Corporate tax losses: As was the case with 3G Capital’s past deals, the large amount of debt involved in the takeover will have significant negative tax consequences. The takeover has the ability to reduce Tim Hortons’ annual Canadian taxes by between C$71 and C$133 million, or between C$355 and C$667 million in the first five years. Based on past performance, 3G Capital is also likely to pursue other tax avoidance strategies that could have an effect on Tim Hortons’ effective tax rate.
- Worse products, higher prices: When 3G’s founders purchased the Budweiser and Beck’s brands, among others, consumers noticed lower quality and higher prices. If 3G Capital follows a similar model at Tim Hortons Inc. (NYSE:THI) (TSE:THI), Canadians will end up paying more for lower quality donuts and coffee.
Tim Hortons – Burger King merger deal’s potential benefits insufficient to counter negative impacts
The deal’s potential benefits are insufficient to counter the likely negative impacts. Few Burger King Worldwide Inc (NYSE:BKW) jobs, if any, will migrate to Canada given that Burger King’s headquarters will remain in Miami.6 And the purported advantage of the deal for Canada — that it will help Tim Hortons expand globally, leading to economic gains in Canada — does not hold up in light of 3G Capital’s record. 3G Capital has said it plans to grow Tim Hortons Inc. (NYSE:THI) (TSE:THI) globally using the same model it has used at Burger King: partner with wealthy foreign investors that have the resources to quickly open a large number of locations.
Burger King relies on these large foreign partners to operate the restaurants, set up supply chains, and support smaller franchisees. None of these functions has created significant jobs at Burger King’s U.S. headquarters, where headcount has shrunk by 50 percent since the 3G Capital takeover.
See full PDF here.