The Double Double Dilemma for Tim Hortons

Brad Allen dissects what impact the Burger King/Tim Hortons merger will have on Tim Horton's (soon to be minority) shareholders.

To be upfront, I’m not a coffee drinker, never really was, don’t like the taste. But I grew up in Hamilton, only a few blocks away from where Tim Horton opened his first store on Ottawa Street. I remember going there occasionally because I liked the donuts. Fast forward to 2006, I had long since left Hamilton, but had a professional connection to Tim Horton’s and was invited to their annual shareholder meeting at a Hamilton store where they introduced the hot breakfast sandwich. I remember thinking, “that was a fine tasting breakfast sandwich.” I was proud of my hometown’s success story. I still am.

When the announcement broke of the Tim Hortons/Burger King combination, many investors cheered as the stock of both companies immediately traded up approximately 20%. Newspapers spouted company fed headlines of, “Third Largest Fast-Food Company, 18,000 restaurants, 100 countries, $23B in system sales”, etc. But my immediate thought was, “what were they (Tim Hortons) thinking?” I didn’t see the non-financial synergy that would reinforce this being a long-term good move. Instead, I saw potential issues that gave me significant cause for concern for Tim Hortons (soon to be minority) shareholders.

Now while we await formal takeover offer documents for Tim’s shareholders to vote upon (Burger King shareholders don’t get a vote as 3G is a controlling shareholder), let’s dissect those issues.

Aversion to tax inversion

Many have made much of the potential tax inversion issue, whereby a US company effectively reduces its US tax burden by shifting its control to a foreign jurisdiction with lower tax rates, in this case Canada (I know, many had the same initial reaction, lower corporate tax burden here in Canada?!).

The US government was quick to condemn BK’s move as unpatriotic at best, and has since enabled legislation to restrict the ability of future deals to take advantage of the current tax loophole. Never a good thing to upset your home government, and the uncertainty of increasingly restrictive tax legislation in the future is not ideal. However, both parties have of course played this down and I am not currently concerned on this issue as a threat to Tim’s shareholder interests.

Global domination. It’s Déjà Vu (all over again)

Now we’re getting warmer. Hasn’t this been done before, unsuccessfully? Not only directly by Tim Hortons with Wendy’s in the mid 90’s, but also by a number of companies in other sectors that regret (along with shareholders) expanding internationally, with challenges relating to different cultures, differing legal/political regimes, brand anonymity, etc (the gold sector comes to mind). The allure of global domination is alive and well, but often rewards a very small group of people, not the shareholders.

Tim Hortons has enviable success in Canada because it made the transition decades ago into part of the fabric of Canadiana. How is that going to translate into success in foreign markets? It will be a tremendously daunting challenge that again may not end well. And if it not, with the strides competition is making here in Canada in coffee sales, Tim’s 95% franchised owned network could find themselves struggling in their home market if a retrenchment is again necessary.

Governance & structure – Two-headed beasts need not apply

Now we’re getting to the heart of the main issue. Much has been made of the press release touting that the new global company will be based in Canada, ostensibly as a nod to TH and Canada being the dominant market of the combined company. Operationally it has been stated each brand will remain managed independently, while “benefiting from global scale and reach and sharing of best practices that will come with common ownership by the new company.” The current headquarters of each company will remain in their respective countries. Many have questioned the operational benefit to Tim’s in this deal. I will focus on what hasn’t been commented upon as much, the structure post transaction.

History has repeatedly shown that attempting to run a large organization under a dual head structure is littered with failures that quickly revert back to a traditional structure. Duplication and inefficiencies, conflicting leadership directives, etc. abound. I don’t see the risk being any less here. However, let’s look more closely at ownership, and board structure of the new company.

This isn’t a dual run company in fact. Firstly, 3G will have majority (51%) stake in the new company. So if remaining shareholders don’t like future potential changes, too bad (and there are a few examples of severe cost-cutting 3G has been involved with in past acquisitions). Secondly, look at the board. BK incumbents will have 8 of the 11 seats, including executive chair, and BK’s current CEO will be the new Group CEO in charge of day to day management and operational accountability. Tim’s will be left with the remaining 3 seats, with their current CEO be in charge of global business development. Does that sound to anyone like Tim’s driving the bus in this equal opportunity merger? Sounds more like they are waiting in the rain hoping to be picked up at the bus stop. How is Tim’s supposed to viably “remain managed independently” when now instead of the 12 board members deemed necessary to run the company they have 3, and no CEO after the transition?

In conclusion

I hope that things work out, we all do as Canadians. But I have serious concerns with the structure of this new company. I do not want another of our national emblems (Blackberry, Nortel) to come limping home on life support after being potentially mishandled for the sake of short term gain for a select few. The shareholders of Tim Hortons deserve better. The government of Canada’s review for net positive benefit hopefully takes these issues into account and comes up with a more balanced structure that ensures a decent chance of long term survival when Tim’s leaves the nest (again).

Brad Allen

Brad Allen is the Founder of βranav Shareholder Advisory Services Inc. βranav provides public company boards and CEOs with independent shareholder intelligence and specialized expertise to help assess, test, and mitigate Shareholder Risk, a latent strategic risk defined as the degree of uncertainty shareholder support may materially affect achievement of strategic objectives. Prior to founding βranav, during the past decade he counseled significant shareholders, management, and boards of Canadian public companies to attain vote support in hundreds of complex shareholder situations related to hostile/friendly M&A, board proxy contests, and other shareholder engagement issues. He appears regularly in broadcast and print media speaking on issues related to shareholder activism and corporate governance insight. Recent appearances include BNN, CBC, Reuters and The Wall Street Journal. You can reach Brad at