Taxes didn’t drive Burger King-Tim Hortons deal: Buffett, Noah Buhayar and Zachary Tracer

“There isn’t a whole lot of intellectual property to transfer with hamburgers,” Buffett said…Those assertions could be disputed… Mimicking a practice that’s become routine among pharmaceutical and technology firms, some food-service companies also have shifted profits to low-tax nations by transferring intangible assets, such as brand names, to subsidiaries in those countries and then charging royalties for their use.

The Globe and Mail
September 18, 2014

Taxes didn’t drive Burger King-Tim Hortons deal: Buffett
Noah Buhayar and Zachary Tracer

Warren%20Buffett%20Tim%20Hortons.JPG

Warren Buffett, chief executive officer of Berkshire Hathaway Inc., speaks during a panel discussion at a Goldman Sachs 10,000 Small Businesses event in Detroit, Michigan, U.S., on Thursday, Sept. 18, 2014. (Jeff Kowalsky/Bloomberg)

Billionaire investor Warren Buffett, who agreed to help finance Burger King Worldwide Inc.’s planned takeover of coffee-and-doughnut chain Tim Hortons Inc., said the deal wasn’t motivated by taxes.

“The highest amount of federal taxes that Burger King has paid in any of the last three years has been $30 million,” Buffett said today on MSNBC. That’s a fraction of the more than $11 billion that the Miami-based fast-food chain agreed to pay for Oakville, Ontario-based Tim Hortons. The combined company will be based in Canada, which has a lower federal tax rate than the U.S.

President Barack Obama’s administration and Congress have been weighing how to dissuade U.S. businesses from moving to other nations in search of lower corporate tax bills. Between mid-June and late July, at least five large American companies announced plans to make such a shift, known as an inversion. That includes AbbVie Inc. and Medtronic Inc.

Buffett said that while the Burger King deal fits the definition of an inversion, it should be distinguished from transactions in which companies shift valuable intellectual property to other nations. Inversions can also limit obligations to the U.S. on profits earned abroad.

“There isn’t a whole lot of intellectual property to transfer with hamburgers,” Buffett said. “This is not a case of trapped cash, it’s not a case of intellectual property. It’s a case of the larger company being in Canada.”

3G Capital
Those assertions could be disputed. While Canada will be the combined company’s largest market and Tim Hortons generates more revenue, the U.S. company had a bigger market capitalization before the businesses announced they were in merger talks. Burger King’s controlling shareholder, 3G Capital, will also have a majority stake in the combined company.

Mimicking a practice that’s become routine among pharmaceutical and technology firms, some food-service companies also have shifted profits to low-tax nations by transferring intangible assets, such as brand names, to subsidiaries in those countries and then charging royalties for their use.

Getting a foreign address would increase the savings generated by such a maneuver, and it also might allow Burger King to attempt the strategy in the U.S., currently its biggest market. Burger King already reduces its taxes in countries including Germany through payments to a Swiss affiliate that owns brand rights, Reuters reported this month, citing a 2012 company statement to the news service.

Buffett’s Berkshire Hathaway Inc., based in Omaha, Nebraska, agreed to invest $3 billion for a preferred stake in the new company paying an annual dividend of 9 percent.

Comments

1. Les Stewart MBA
I agree with the Oracle: not for taxes, primarily. The CDN numbers add up like this over 5 years:

1. Assume maximum 3% straight line COGS increase forced onto 3.600 CDN franchised stores will yield about $540-m (mean store sales = $2-m).

2. "Only" taking 50% of store resale value (eg. exiting franchisee must sell to 3G; 3G to new guy): 5% store turnover, $.5-m per store = $450-m.

3. 1% drop in head leasing costs: "negotiates" lower head lease costs and keeps 100% savings under the prospects of a "down-and-dirty CCAA" (watch out mom-and-pop property owners) = $360-m.

4. Bear/bull stock pricing revenue (publicly-traded franchisees) =?-m.

5. Break the inconvenient USA franchisee-controlled Burger King independent franchisee association/union/wholesaler: priceless

6. Gravy from sales consultants, bank lenders, consultants, renovation contractors, tax, legal, etc as the new generations of new CDN franchisees use non-registered "liar loan" CSBFA loans to finance a rapidly-becoming negative gross margin post-Joyce/Wendy's system (just like Country Style, Second Cup, Coffee Time, etc.) = ?-m

Looks like +$1.3B into the franchisor's coffers with the franchisees left to layoff their long term staff/friends.

Dairy Queen - Warren Buffett - Burger King - Tim Hortons

2. just tom

just tom Less than a minute ago

Preferred at 9% wow! As one writer pointed out recently this deal is highly leveraged and there will not be much cash left for the common shareholders as far as dividends are concerned. Pay the interest, pay down the loan, 9% on 3 bilion of preferred. Take your profit and forget Timmies afterwards

3. HighAltitude
9% dividend???of course..

http://www.scoopnest.com/out/?url=http://t.co/PwQZlES7Cx&id=512907259777937408


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