Liz Hoffman And
Aug. 24, 2014 7:51 p.m. ET
Tim Hortons is Canada’s biggest coffee and doughnut chain. REUTERS
Burger King Worldwide Inc. BKW +1.01% is in talks to buy Canadian coffee-and-doughnut chain Tim Hortons Inc., THI.T +2.79% a deal that would be structured as a so-called tax inversion and move the hamburger seller’s base to Canada, according to people familiar with the matter.
The two sides are working on a deal that would create a new holding company, one of the people said, adding that the takeover would create the third-largest quick-service restaurant provider in the world.
One of the people said a deal between the two companies could be struck soon, though additional details on timing couldn’t be learned. Together the restaurant companies have a market value of about $18 billion.
By moving to a lower-tax jurisdiction, inversion deals enable companies to save money on foreign earnings and cash stowed abroad, and in some cases lower their overall corporate rate.
Such deals threaten to deplete U.S. government coffers, and they have drawn stiff opposition in Washington. Efforts are under way to limit their use.
After a tide of tax-inversion deals—including AbbVie Inc. ABBV +0.44% ‘s purchase of Ireland’s Shire SHPG +0.04% PLC and Medtronic Inc. MDT -0.80% ‘s agreement to buy Ireland’s Covidien COV -0.85% PLC, with other deals expected in the coming months—the White House called on Congress to take steps to prevent companies from pursuing inversions.
The Treasury Department recently said it is assembling a list of options to deter or prevent the deals for Secretary Jacob Lew to consider. The Obama administration signaled earlier this month that it is considering regulatory action on inversions that could include earnings stripping.
A move by Burger King to invert is sure to intensify criticism of the deals, since it is a well-known and distinctly American brand.
In the current wave of such deals, most inversions have been struck by health-care companies. An inversion deal by Burger King would suggest that the deals have wider appeal beyond the health industry, as companies from a range of industries consider ways to become more competitive from a tax perspective.
Burger King was founded in 1954 with a single restaurant in Miami, where it is now based. It has since grown to be the world’s second-largest hamburger chain, according to the company’s website. There are more than 13,000 Burger King locations in nearly 100 countries, serving more than 11 million people daily, the site says.
Tim Hortons, based in Oakville, Ontario, is well-known for its coffee, a high-margin area where U.S. fast-food giants have raced to grab market share. Burger King has been adding more coffee items and flavors to its menus to catch up with rival McDonald’s Corp. MCD -0.08% , which has had success with a specialty coffee line called McCafe. Burger King paired up with Seattle’s Best Coffee, a brand owned by Starbuck’s Corp., to help its effort gain traction.
The brands would be managed separately under a Burger King-Tim Hortons deal, one of the people said.
Tim Hortons has shares that trade in the U.S. and Canada and a market capitalization of about $8.4 billion. Last year, hedge funds Scout Capital Management LLC and Highfields Capital Management LP announced stakes in the company and called for Tim Hortons to curtail its U.S. expansion plans and increase its leverage to buy back more shares.
In 2010, Brazilian private-equity firm 3G Capital Management bought Burger King and took the chain known for its Whopper burgers private. A few years later, the company structured a complex deal with an investment vehicle co-owned by activist shareholder William Ackman to go public again. The company now has a market capitalization of about $9.6 billion.