Burger King is in talks to acquire Canadian coffee and doughnut chain Tim Hortons Inc in a deal that would create a fast food powerhouse with a market capitalization of roughly $18 billion.
Burger King and Tim Hortons, comparable in size by market value, confirmed their merger discussions late on Sunday, saying the new company would be the world's third-largest quick service restaurant. It would be based in Canada, which has lower overall corporate taxes than the United States, especially for entities that have large amounts of earnings from overseas.
The proposed deal would be structured as a so-called tax inversion transaction to move Burger King's domicile out of the United States, and could come as soon as in the next few days, according to sources familiar with the discussions.
Recent attempts by companies for tax inversion deals, which are done to avoid higher U.S. taxes and save money on foreign earnings and cash held outside the United States, have drawn the attention of President Barack Obama, who criticized a "herd mentality" by companies seeking such deals.
Tax inversions have become popular in recent months as low interest rates are making it cheaper for companies to make acquisitions, KeyBanc analyst Christopher O'Cull wrote in a note to clients about the potential deal.
Tim Hortons, on a forward earnings basis, is trading at a discount to Burger King, noted O'Cull. This factor likely makes an acquisition of the only slightly less valued Canadian chain more viable.
Walgreen Co recently decided against a tax inversion deal in its takeover of European pharmacy chain Alliance Boots, saying it was not in the best long-term interest of shareholders to attempt to re-domicile outside the U.S.
Amid heightened political sensitivity in the United States to such tax-cutting transactions, Walgreen said it was mindful of the public reaction to a potential inversion deal.
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