BKWH - Burger King Worldwide Holdings

[blainehodder]

I am perplexed why Tim Hortons would want anything to do with this deal.  Although I dont particularly care, the culture of Burger King may ruin the culture of Tim Hortons. 

 

Tim Hortons sells something like 50% of all fast food in Canada, and 75-80% in the baked goods/coffee category.  Burger King, on the other hand, has struggled for 50 years to stay alive in Canada at all. 

 

Other than enriching the pockets of the TH management, I just dont see the benefit to TH.

 

Well, as a shareholder of the Tim Hortons business, I'll tell you what is in this deal for me: Money!

 

A significant sum of money, right now.  I am an owner in businesses to make money. This deal makes me money quickly.  Not sure what else needs to be in it for me?  Why else would you buy stocks?

 

What isn't in it for me?

 

Some sort of patriotism and fun in owning a significant portion of the Canadian market? Even if I cared about that, I will still have it if I choose to hold the shares.

 

I'm also unsure why 3G running the business could possibly be anything but good?  There is a reason why Buffett throws money into deals with them and leaves them alone to do the work. They are very good. I haven't decided if I will sell out, but either way it is clear what is in it for me.

[oddballstocks]

 

 

Ahh millennial bashing.  It sucks not being taken serious in life, but then I realize that those in their 40s, 50s, and 60s who are bashing us would switch places in an instant.

 

I've come to appreciate in adulthood there are two stages: too young and too old.  For years one is too young, too inexperienced, too new.  Then suddenly they hit an age (opinions differs on exactly what it is) and they're too old fashion, too structured, closed to new ideas.  There is no middle ground, but I'd rather be young over being old.. Unfortunately I'm quickly moving towards too old.

 

Sorry for the derail...but I am 52. I would not want to go back to 25 or even 35. What I had in energy I lacked in wisdom ( and general contentment).

 

BTW, I would have bet everything I had at age 25, that I would NOT have felt this way now.

 

Go figure.....

 

I believe contentment is one of the keys to life, the sooner one finds it the better.  I'm 33, I wouldn't go back to 25 either.  I'm wiser (hopefully) and in better shape now.  But from what I see in friends who are older I'm about to hit my peak physical shape.  I know at 25 I had more energy.  I remember running 6-7 miles at a 7:30 pace after not running for a year without a problem.  I can't do that cold anymore, I need to be in shape to do that now.  It takes longer to recover from a really long run, or an intense backpacking trip.  Injuries take longer to heal as well.

 

There are times even now I wish I had the energy of 10 years ago, especially when trying to keep up with my kids, their energy is endless.

 

My issue is the things that I enjoy doing are all physical, skiing, biking, running, hiking.

[Aberhound]

The BK marketing genius that came up with "whopper Wednesday" works out of the Vancouver office. The slowest day was turned into the best day by causing a habit to be formed. BK has been using a new app in Vancouver because of the same guy and I bet their numbers are way better than elsewhere. Tim Horton's turned down the same app.

 

If the Vancouver marketing is spread out across both chains the results could make the combined company a buy.

[loganc]

The transaction is expected to be taxable, for U.S. federal income tax purposes, to the shareholders of Burger King, other than with respect to the partnership units received by them in the transaction. The transaction is expected to be taxable to shareholders of Tim Hortons in the U.S and Canada.]The transaction is expected to be taxable, for U.S. federal income tax purposes, to the shareholders of Burger King, other than with respect to the partnership units received by them in the transaction. The transaction is expected to be taxable to shareholders of Tim Hortons in the U.S and Canada.

 

If I understand this correctly, current gains in BKW shares will be taxed when this deal closes.  I wonder what Ackman thinks of this.  Also, 3G is talking all partnership units which defers taxes - nice move for them.

 

More detail here:

 

http://www.bloomberg.com/news/2014-08-26/burger-king-backers-to-avoid-u-s-anti-inversion-penalty.html

[loganc]

From Levine (http://www.bloombergview.com/articles/2014-08-26/warren-buffett-funds-global-donut-burger-behemoth):

 

U.S. shareholders of Burger King who are not 3G, on the other hand, can defer up to 1 percent of their taxes by electing partnership units, which seems somewhat ungenerous.

 

No joke.  My rough estimate is that there are about 1.65B of gains that will be taxed here and Ackman will be the largest tax payer as a result of this structure.

[jay21]

Presentation: http://www.sec.gov/Archives/edgar/data/1547282/000119312514320936/d781770dex991.htm

 

From Levine (http://www.bloombergview.com/articles/2014-08-26/warren-buffett-funds-global-donut-burger-behemoth):

 

U.S. shareholders of Burger King who are not 3G, on the other hand, can defer up to 1 percent of their taxes by electing partnership units, which seems somewhat ungenerous.

 

No joke.  My rough estimate is that there are about 1.65B of gains that will be taxed here and Ackman will be the largest tax payer as a result of this structure.

 

And question: 3G can't allocate themselves all LP units and not offer that to all other shareholders, right? It strikes me as odd that some shareholders will be taxed and others can defer the tax. Unless I read your quote wrong?

[Guest hellsten]

I thought BKW was expensive in 2012. Looks even more expensive now. I should have listened to Mr. Ackman and Mr. Buffett:

WB: It’s accurate. I met Georgie in December, and he said he was thinking of going into Heinz. Because I knew them both and thought high of them, I said I’m in. Then they got me a term sheet. Georgie Paolo brought me a term sheet on the deal and it was good. Absolutely fair deal. I didn’t change a word in either. Charlie and I paid more than if we were doing the deal ourselves because Georgie Paolo is a great manager, because he’s so classy, so we stretched a little. I like the business. The design of the deal is if we do good at Heinz we will get a high rate of return. Less leveraged than them. They wanted more leverage. In five years they receive higher rate of return but us with more money will get more.

 

http://m.gurufocus.com/news_read.php?id=218379

 

BKWH has the potential to trade between $26 and $41 per share by 2016, depending on the extent to which management is successful in executing

its domestic turnaround and international growth strategies.

Management is doing all of the right things…

… and has an impressive track record of success

3G Capital and management have enormous “skin in the game”

The substantial majority of management options cliff vest in 2015 or later

If management can achieve its strategic objectives at home and abroad, the stock price could triple by 2016

 

http://justiceholdingsltd.com/wp-content/uploads/2012/04/Justice-Is-Best-Served-Flame-Broiled.pdf

 

GARP, GARP, GARP.

[loganc]

Presentation: http://www.sec.gov/Archives/edgar/data/1547282/000119312514320936/d781770dex991.htm

 

From Levine (http://www.bloombergview.com/articles/2014-08-26/warren-buffett-funds-global-donut-burger-behemoth):

 

U.S. shareholders of Burger King who are not 3G, on the other hand, can defer up to 1 percent of their taxes by electing partnership units, which seems somewhat ungenerous.

 

No joke.  My rough estimate is that there are about 1.65B of gains that will be taxed here and Ackman will be the largest tax payer as a result of this structure.

 

And question: 3G can't allocate themselves all LP units and not offer that to all other shareholders, right? It strikes me as odd that some shareholders will be taxed and others can defer the tax. Unless I read your quote wrong?

 

I think it is just unclear from the press release.  I read a WSJ article today that implied that the LP units will end up being distributed on a pro rata basis.  Also, the total number of LP units that will be available is unclear.

[ItsAValueTrap]

The calls are cheap right now because the borrow on BKW is expensive.  (Likely due to merger arbs shorting BKW and going long THI.)

[bennycx]

The calls are cheap right now because the borrow on BKW is expensive.  (Likely due to merger arbs shorting BKW and going long THI.)

 

? wouldn't calls be expensive if the borrow is expensive?

[ItsAValueTrap]

No.  If the borrow is expensive, the calls get cheaper and the puts more expensive.

[bennycx]

can you please explain?

[ItsAValueTrap]

can you please explain?

 

http://www.investopedia.com/university/shortselling/shortselling1.asp

http://www.investopedia.com/articles/stocks/08/borrowed-securities.asp

 

http://www.investopedia.com/university/options-pricing/

http://www.investopedia.com/university/options-pricing/put-call-parity.asp

 

http://www.wilmott.com/messageview.cfm?catid=3&threadid=26773

 

[LC]

If I buy the stock and loan it out I get a high yield from the borrow rate. Call options compensate for this discrepancy by selling at a more attractive price.

[original mungerville]

Does anybody have a handle on this deal in terms of value creation for BKW under 3G management?

 

Ie are we talking (in order of importance):

 

1. Tax

2. Wringing out efficiency savings at Tim Hortons

3. Synergies in terms of BKW using its more global presence to drive Tim Horton expansion globally.

4. Maybe creating a REIT from the real-estate under the Tim Horton stores (they are already almost fully franchised, so that is not an option to extract capital.

 

I am very skeptical on #3. While we Canadians are attached to Tim Hortons, the coffee is frankly not that good. So if they try to take this thing to Europe, I have trouble seeing how they compete against McDonalds in the coffee area (or Starbucks for that matter). They have already tried to expand into the US with limited success.

 

Also, has anybody found a really good analysis of the deal with possible synergy / cost saving projections?

 

 

 

[ItsAValueTrap]

I think other countries would be interested in licensing the intellectual property because Tim Hortons in Canada is ridiculously profitable.  (I assume it is; I haven't looked at the actual numbers though.)

 

3G has had success licensing/franchising their restaurants in other countries with Burger King.  So I assume they want to do the same with Tim Hortons.  I assume that they've figured out how to do excellent deals that make sense for both parties.

 

2- Licensing is a really, really good business.  It can potentially have very high returns on capital.

 

3- 3G might do some cost cutting at Tim Horton's.  Their margins went down dramatically as Tim Hortons tried to do hypergrowth in the US.

[KCLarkin]

I am very skeptical on #3. While we Canadians are attached to Tim Hortons, the coffee is frankly not that good. So if they try to take this thing to Europe, I have trouble seeing how they compete against McDonalds in the coffee area (or Starbucks for that matter). They have already tried to expand into the US with limited success.

 

I think Dominoes pizza is frankly not that good. But it's international expansion has been very successful. Actually, I think BK is pretty awful too. The product you are selling is really the franchise system. BKW seems to have a done a good job with international franchisees with a 3rd tier burger chain.

 

You really need to bet on the jockey here though. Tim's has proven that THEY can't expand internationally. 3G believes that they can do better. Based on their track record, I don't think it would be a great idea to bet against them.

 

I just started reading Dream Big and the THI purchase seems to be almost an exact copy of the AB InBev strategy.

[original mungerville]

OK, that is what I am trying to figure out - if this is worth buying into or not. But there are just too many unknowns for me. Betting on revenue synergies is tough for me. Of course 3G management is great but that seems to be reflected in the total market cap of the combined companies.

 

Is there a good case to be made here for investment?

[KCLarkin]

Is there a good case to be made here for investment?

 

I own Tim Horton's so I need to decide whether to hold onto BKW after it closes. It's not a large enough position for me to do a deep dive but if I get some time I want to dig in because it is such a fascinating case study. On the surface, the valuation looks nauseating.

[ClientNine]

Hi,

 

I have some ramblings about the tax consequences of the deal. I've been a shareholder of BKW for two years and I am concerned about the way that minority shareholders seem to be getting treated by 3G. The merger prospectus is here:

 

http://www.sec.gov/Archives/edgar/data/1345111/000119312514327619/d780808dex21.htm

 

And this article by Matt Levine, linked to earlier on this thread:

 

http://www.bloombergview.com/articles/2014-08-26/warren-buffett-funds-global-donut-burger-behemoth

 

So, it seems that 3G Capital is creating an exchangeable limited partnership that can be converted into shares of the combined BKW/THI at any time. According to Levine on Bloomberg, they are reserving just 1% of of the limited partnership units for outside shareholders (though I struggle to find the language specifying this in the legalese of the prospectus -- can anyone help with this?)

 

For those of us who are long time investors in BKW and don't have shares in an IRA or other tax-deferred account, this is a really bad outcome. In my case, my cost basis is below $17 and I have a ~100% gain that I will pay taxes on now. I had intended to own BKW for a long time given the incredible track record of 3G with other acquisitions and the strong operational, financial and growth initiatives that were underway at BKW.

 

Now, owing taxes on my appreciation to date, I am essentially forced to "sell" my shares for tax purposes, since holding the shares will result in capital gains taxes and a reset of my tax basis to the price current as of the exchange date. Since the stock doesn't represent the bargain today that it represented at the time of my purchase (net of synergies from the deal I think of the current $34 price as 85 cents on the dollar), I think I am better off selling the stock totally rather than holding on and swallowing the tax bill.

 

What's disappointing is that 3G would structure this deal to allow themselves to escape this large tax bill and defer it indefinitely (really, creating a situation that's no different for tax purposes from a continued ownership in the equity itself). In the most recent 10K, in a section that I didn't pay too much attention to, Burger King says:

 

In addition, 3G Capital may have an interest in pursuing acquisitions, divestitures, financings, capital expenditures or other transactions that it believes could enhance its equity investments even though such transactions might involve risks to other stakeholders.

 

It seems like that disclosure has come home to bite outside investors in a big way. I personally met Jorge Paolo Lemann at the Berkshire meeting this year, I've read the book about him, and I shared Buffett's admiration for him. It seems I was wrong?

[KCLarkin]

Hi,

 

I have some ramblings about the tax consequences of the deal. I've been a shareholder of BKW for two years and I am concerned about the way that minority shareholders seem to be getting treated by 3G. The merger prospectus is here:

 

http://www.sec.gov/Archives/edgar/data/1345111/000119312514327619/d780808dex21.htm

 

And this article by Matt Levine, linked to earlier on this thread:

 

http://www.bloombergview.com/articles/2014-08-26/warren-buffett-funds-global-donut-burger-behemoth

 

So, it seems that 3G Capital is creating an exchangeable limited partnership that can be converted into shares of the combined BKW/THI at any time. According to Levine on Bloomberg, they are reserving just 1% of of the limited partnership units for outside shareholders (though I struggle to find the language specifying this in the legalese of the prospectus -- can anyone help with this?)

 

For those of us who are long time investors in BKW and don't have shares in an IRA or other tax-deferred account, this is a really bad outcome. In my case, my cost basis is below $17 and I have a ~100% gain that I will pay taxes on now. I had intended to own BKW for a long time given the incredible track record of 3G with other acquisitions and the strong operational, financial and growth initiatives that were underway at BKW.

 

Now, owing taxes on my appreciation to date, I am essentially forced to "sell" my shares for tax purposes, since holding the shares will result in capital gains taxes and a reset of my tax basis to the price current as of the exchange date. Since the stock doesn't represent the bargain today that it represented at the time of my purchase (net of synergies from the deal I think of the current $34 price as 85 cents on the dollar), I think I am better off selling the stock totally rather than holding on and swallowing the tax bill.

 

What's disappointing is that 3G would structure this deal to allow themselves to escape this large tax bill and defer it indefinitely (really, creating a situation that's no different for tax purposes from a continued ownership in the equity itself). In the most recent 10K, in a section that I didn't pay too much attention to, Burger King says:

 

In addition, 3G Capital may have an interest in pursuing acquisitions, divestitures, financings, capital expenditures or other transactions that it believes could enhance its equity investments even though such transactions might involve risks to other stakeholders.

 

It seems like that disclosure has come home to bite outside investors in a big way. I personally met Jorge Paolo Lemann at the Berkshire meeting this year, I've read the book about him, and I shared Buffett's admiration for him. It seems I was wrong?

 

I suspect this 1% number is being confused with the the default % of units you will receive. You can elect for more. You will be pro-rated as discussed below. If you want to hold onto your BKW, you could request 100% units and sell whatever common you are allocated.

 

(iii) Proration. If the aggregate number of Exchangeable Units that would otherwise be issued as Exchangeable Security Consideration to Parent Shareholders in the aggregate based on the operation of Section 2.3(e)(iii) and the aggregate number of Exchangeable Elections in the absence of this Section 2.3(f)(iii) (the “Non-Prorated Exchangeable Units”) exceeds the Exchangeable Unit Election Number, then the Parent Common Shares shall be treated in the following manner:

(A) A unit proration factor (the “Exchangeable Unit Proration Factor”) shall be determined by dividing the Exchangeable Unit Election Number by the total number of Non-Prorated Exchangeable Units.

(B) Each holder of Parent Common Shares shall receive (i) a number of Exchangeable Units equal to the product of (x) the Exchangeable Unit Proration Factor multiplied (y) such Parent Shareholder’s number of Non-Prorated Exchangeable Units (the product of clauses (x) and (y), the “Prorated Exchangeable Units”) and (ii) a number of additional Holdings Common Shares equal to (x) such Parent Shareholder’s number of Non-Prorated Exchangeable Units minus (y) such Parent Shareholder’s number of Prorated Exchangeable Units.

© The number of Exchangeable Units that may be issued to holders of Parent Common Shares hereunder shall not exceed the number of such Exchangeable Units that would cause the fair market value of Holdings’ interest in the Partnership to be less than 50.1% of the fair market value of all equity interests in the Partnership (the “Exchangeable Unit Election Number”). The Exchangeable Unit Election Number shall be determined as of the Closing Date, taking into account the fair market value of all common units and preferred units in the Partnership to be held by Holdings as of immediately after the Merger Effective Time, but disregarding any contingent interests in the Partnership attributable to any options issued by Holdings, all as reasonably determined by Holdings.

[fareastwarriors]

Why Burger King Is Paying 9% for Warren Buffett’s Blessing

 

 

 

http://blogs.wsj.com/moneybeat/2014/09/03/why-burger-king-is-paying-9-for-warren-buffetts-blessing/

[gfp]

In case anybody else was having trouble finding this circular, it is filed under "New Red Canada Partnership" as well as "1011773 B.C. UNLIMITED LIABILITY COMPANY"

 

http://www.sec.gov/Archives/edgar/data/1618755/000119312514342421/d786007ds4.htm

 

 

edit: Berkshire's warrants are .01 CAD strike "penny warrants" - quite the kicker since they were included in the $3 Billion total.

[Grenville]

In case anybody else was having trouble finding this circular, it is filed under "New Red Canada Partnership" as well as "1011773 B.C. UNLIMITED LIABILITY COMPANY"

 

http://www.sec.gov/Archives/edgar/data/1618755/000119312514342421/d786007ds4.htm

 

 

edit: Berkshire's warrants are .01 CAD strike "penny warrants" - quite the kicker since they were included in the $3 Billion total.

 

What sort of equity stake does it give Berkshire in the combined entity?

[gfp]

1.75% of the fully diluted share count of the combined entity (including BRK's shares once exercised) - it's a decent chunk of change, which implies that the dividend yield on the $3 Billion is a lot higher than 9%, since a portion of the cost basis will be allocated to the warrants at their intrinsic value.  Looks like the true yield could be above 10%.