Burger King has acquired iconic Canadian coffee shop chain, Tim Hortons for $12.5 billion. The deal creates the third-largest fast food company in the world, worth a combined $23 billion.

The deal has been structured as a tax inversion by Burger King. Tax inversions, or inversion deals, are an increasingly popular legal maneuver made by American companies in an effort to avoid paying higher US taxes and save money on foreign earnings and cash held outside the United States.

The US corporate tax rate is currently the highest in the industrialized world, at 35 percent. Since 1994, 55 inversion deals have taken place in the US, 20 of which occurred in the last 18 months. Popular destinations for inversion deals include the UK, with a corporate tax rate of 21 percent, and Ireland (12.5 percent). If Burger King were to re-domicile in Ontario, Canada (where Tim Horton’s headquarters are located), it’s tax rate would drop to 26.5 percent.

Of course, the merger is not only contentious from Burger King’s standpoint. “The sale of Tim Hortons, a popular and ubiquitous Canadian corporate status symbol, would cross business, political and cultural lines [as well], with potentially huge ramifications,” according to the Globe and Mail. This is the second time the iconic Canadian restaurant chain has moved into foreign hands. In 1995, Tim Hortons was bought by Wendy’s International, but was spun out in an IPO in 2006 after the chain came under pressure from activist investor Nelson Peltz.

The Burger King/ Tim Hortons merger is indeed interesting and unexpected. Here’s a breakdown of what each side will gain from the deal:

Burger King

Tim Hortons

Market cap: $9.6 billion Market cap: $8.4 billion
Market position: 2nd largest US burger chain Market position: Canada’s largest coffee shop chain
Headquarters: Miami, Florida Headquarters: Oakville, Ontario
Locations: 13,000 stores in 98 countries Locations: 4,388 stores across Canada, the US and Persian Gulf region
Corp tax rate: 35 percent (paid $88.5M in US taxes in 2013) Corp tax rate: 26.5 percent (federal + provisional tax)
Ownership: Burger King’s majority shareholder, 3G Capital, will have 51 percent ownership of the new company Ownership: Remaining shares held by existing shareholders of Tim Hortons and Burger King
Operations: Remain a standalone brand, shared corporate services Operations: Remain a standalone brand, shared corporate services
Past experience: Built a large global footprint Past experience: Struggled with US expansion; increased domestic competition from McDonald’s and Starbucks
Merger benefit: Lower corporate tax rate Merger benefit: Leverage Burger King’s global experience to help expand globally

 

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