Warren Buffett just made another bet on junk food, and the big idea is to sell it around the clock — and around the world.
The folksy billionaire is backing Burger King’s acquisition of Canadian doughnut chain Tim Hortons, an $11.4 billion deal that kicked up controversy this week over its potential tax implications.
Insiders, however, say the promise of lowering Burger King’s corporate taxes in a so-called “inversion” by moving its headquarters from the US to Canada — leading some to call for a boycott of the burger joint — has been overblown.
Instead, sources said Burger King’s Buffett-backed deal will use Tim Hortons to prop up its sagging international franchise growth, which has been dogged by relatively skimpy profit margins and high opening costs.
The pitch to prospective franchisees worldwide: Tim Hortons’ coffee and doughnuts sell briskly in the morning and late at night — the two times of day when demand for Burger King’s Whoppers and fries is weakest.
“I’m not sure they’re going to foist both businesses onto everyone,” said Mortimer Singer, CEO of Marvin Traub Associates in New York. “But it’s quite nice if you’re a franchisee to be able to open two units next to each other.”
The fast-food megadeal — which is getting $3 billion in preferred equity financing from Buffett’s Berkshire Hathaway — is being driven by 3G Capital, the Brazil-based fund that controls Burger King and which partnered with Buffett last year to take ketchup giant Heinz private.
Among 3G’s other recent deals has been last year’s move to merge Anheuser- Busch InBev with Mexico brewer Modelo, a combo that was likewise concocted to drive global growth.
In this week’s deal, sources said, 3G is looking to transform the Tim Hortons brand into an international powerhouse by using Burger King’s overseas franchising network, which spans nearly 100 countries.
“The assets of Tim Hortons are worth more in Burger King’s hands than they are in Tim Hortons’,” says Niraj Dawar, a marketing professor at Ivey Business School at Western University in Ontario.
“Burger King is much more global than Tim Hortons, and can use the strength of this new brand to compete with McDonald’s.”
While Tim Hortons dominates in Canada, its brand recognition elsewhere is scant. The chain’s recent foray into the US has been a struggle as it has squared off against US giants led by Starbucks and Dunkin’ Donuts.
The story could be different in fast-growing markets like China, India and the Middle East, industry experts say.
In the United Arab Emirates — one of the only overseas markets Tim Hortons has ventured into — its coffee shop attracted “lines around the block” when it first opened, according to Singer.
“The importance of food globally is really coming into focus now,” Singer said. “The size of food courts is growing exponentially, particularly in emerging markets.”
Buffett’s abiding taste for junk food has famously resulted in long-term bets on other brands, including Coca-Cola, Dairy Queen and See’s Candies.