DealBook: Burger King in Talks to Buy Tim Hortons

Burger King may be home of the Whopper. But the fast-food chain may soon start calling Canada its new corporate residence.

The restaurant operator said on Sunday that it is in talks to buy Tim Hortons Inc, the Canadian donut-and-coffee chain, in a potential deal that would create one of the world's biggest fast-food chains.

But if completed, the deal would mean the burger giant's corporate headquarters would move to Canada, raising the specter of yet another American company switching its national citizenship to lower its tax bill.

Under the expected terms of the deal, Burger King would create a new corporate parent that would house both chains, which would be operated independently. Together, the two companies would have a market value of more than $18 billion.

An agreement could be reached as soon as this week, a person briefed on the matter said.

Though the two companies are expected to argue that a merger would bring a host of strategic benefits, it would nevertheless count as a so-called corporate inversion. Many American companies have looked toward takeovers of foreign companies, and then redomiciling abroad to lower their overall tax bill.

Inversions have become increasingly popular, though the practice has come under fire from Washington as the Obama administration and lawmakers have complained that companies that do so are unfairly — though legally — cutting their tax bills. The practice gained new prominence when Pfizer, one of the biggest names in corporate America, pursued an attempted takeover of AstraZeneca of Britain in an effort to find a lower tax rate in a new home.

Treasury Secretary Jacob J. Lew recently said that the White House is weighing whether to take a harder line on inversions, and that it has already identified potential ways in which it can block the corporate tax flight without having to run legislation through Congress.

Though most of the companies that have employed inversions are big drug makers like AbbVie, which makes Humira but isn't a household name, Burger King would be one highly visible to consumers. One company in a similar position, the pharmacy chain Walgreen, have cited potential pressure from Main Street and Washington as a factor in foregoing a corporate relocation.

The American corporate tax rate is about 35 percent, while Canada's is about 15 percent. But people briefed on the deal negotiations said that the main driver in the talks is not taxes. Burger King already pays a tax rate of roughly 27 percent, and would shave off only a couple of percentage points by moving to Canada.

And Burger King does not have a significant amount of cash held abroad, these people said. Companies often pursue inversions to access their overseas cash operations without being hit by a big American tax bill.

One potential reason for the move may be to placate Canadian authorities. Deals in the country are governed by the Investment Canada Act, which allows the national government to block a merger if it is deemed not in the best interests of the country.

Given Tim Hortons' status as one of the country's iconic restaurants, the potential merger structure would allow it to remain Canadian. (However, the company was previously owned by Wendy's, until it was spun off in 2006.)

The two companies are expected to argue that the deal makes sense because it would create a stronger competitor to McDonald's and Yum Brands, the owner of Taco Bell and KFC. The combined restaurant operator would have about $22 billion in revenue and more than 18,000 restaurants worldwide.

Uniting Burger King and Tim Hortons would allow the company to grow faster worldwide, while creating a restaurant operator whose offerings span from breakfast to lunch to dinner and snacks.

Breakfast may be an especially important attraction for Burger King and its majority owner, the Brazilian investment firm 3G Capital. The restaurant chain has followed McDonald's in introducing more breakfast and coffee offerings.

In Tim Hortons, Burger King will be getting a restaurant chain that is essentially synonymous with breakfast in Canada, with coffee, donuts and other offerings. As of late June, the chain ran 4,546 locations, the vast majority of which are in Canada.

A takeover of Tim Hortons would be the latest twist in the 60-year-old life of Burger King. Sprung from a burger joint in Florida, it became a rival to McDonald's. But it has never surpassed its rival, even after being taken over and reworked by private equity investors multiple times.

3G Capital bought control of the fast-food chain for $4 billion four years ago, focusing on a relentless cost-cutting initiative to help fix its troubled operations. It then brought Burger King back to the public markets two years ago by merging it with a publicly traded investment firm.

The company currently operates 13,000 locations, all of which are run by franchisees.

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