Burger King's purchase of Tim Hortons will create the third-largest fast food firm. The merged group faces the challenge of winning over breakfast eaters from McDonald's and Starbucks, which are better known in America for offering the morning meal. Photo: AP

Leslie Patton and Craig Giammona Chicago and New York

BURGER King Worldwide had agreed to buy Tim Hortons for C$12.5 billion (R122bn), the firms said yesterday, in a deal that creates the third-largest fast food group and moves Burger King’s headquarters to Canada.

Tim Hortons investors would receive C$65.50 in cash and 0.8025 a share of the combined entity for each share they owned. The price deal values each Tim Hortons share at C$94.05 based on Burger King’s closing price on Monday.

The purchase gives Burger King access to a coffee brand with a cult following, which might help boost breakfast sales. Tim Hortons, Canada’s biggest seller of coffee and doughnuts, will also allow Burger King to get into the grocery business by selling packaged coffees at supermarkets in North America.

The new combined business would have $23bn (R246bn) in system sales and 18 000 restaurants in 100 countries.

The acquisition also moves the merged company’s global headquarters to Canada to take advantage of lower corporate taxes. When the firms disclosed the talks at the weekend, debate was revived over US groups shifting their headquarters to other countries in search of lower corporate tax bills. President Barack Obama criticised the practice last month, and his aides said that the administration would take action to stop the trend.

3G Capital, the investment firm that owns Burger King, will have about 51 percent of the new company.

Warren Buffett’s Berkshire Hathaway has committed $3bn of preferred equity financing. Berkshire will not participate in managing the restaurant business.

3G, co-founded by Brazilian billionaire Jorge Paulo Lemann, joined Buffett last year in a $23.3bn takeover of HJ Heinz. Buffett bought half the tomato sauce maker’s common stock for $4.25bn and invested $8bn for preferred shares that pay a 9 percent annual dividend and give Berkshire warrants to buy an additional 5 percent stake.

“3G does a magnificent job of running businesses,” Buffett said in May. “We’re very likely to partner with them, perhaps on some things that are very large.”

Burger King, the second-largest US burger chain, has struggled to boost North American same-store sales and compete with McDonald’s breakfast fare.

Buying Tim Hortons will give Burger King a coffee brand that is coveted by Canadians, and some Americans, to help revamp its breakfast line-up.

Tim Hortons would enter new countries where Burger King had already sold franchises, said John Gordon of Pacific Management Consulting in San Diego. But some countries were heavier tea drinkers, which could be a challenge.

Using the Tim Hortons brand at Burger King would mean building awareness among its customers. Only 30 percent of Americans had heard of the name, according to YouGov BrandIndex. That compared with 90 percent for Starbucks and Dunkin’ Donuts.

In the US, there is mounting competition for breakfast customers. McDonald’s started selling egg-white breakfast sandwiches earlier last year and gave away free coffees to entice more customers in the morning. Starbucks is also adding new breakfast food, including Greek yoghurt smoothies.

Restaurants increasingly needed to sell appealing fare at all hours, said Allen Adamson at brand consultancy Landor Associates in New York.

“They can’t just be a dinner or lunch place anymore,” he said. “But buying your way into breakfast isn’t that easy.”

Wendy’s found that out the hard way after trying to hawk homestyle potatoes and chicken biscuits in the US. The chain got out of the breakfast business last year after the fare did not sell well. – Bloomberg