Brandau: BK getting out of ‘dodge’?

On paper, the megadeal announced Tuesday to merge Burger King and Tim Hortons makes sense. The newly combined venture leapfrogs Subway to become the third-largest restaurant company in the world, and unlike former parent Wendy’s years ago, Burger King offers a much more robust international footprint that Tim Hortons could leverage to ignite growth outside North America. But the placement of the combined company’s headquarters in Canada gives me pause. If the overwhelming reason for the deal was so Burger King could get a lower corporate-tax rate in Canada — and I doubt it’s the majority reason — then the whole thing is a bad idea. If we take the announcement at face value and assume Burger King is into Tim Hortons for the corporate synergies, then perhaps the “tax inversion” created by reincorporating in Ontario is merely a cynical part of a bigger business bet. Admittedly, Burger King gains a favorable spread in corporate taxes by moving the new company’s joint headquarters from the United States and its 35-percent tax rate to Ontario, which combines a national 15-percent rate and a provincial 11.5-percent rate. Shareholders rightly would praise the millions of dollars that would remain in the company’s coffers as a result. But a deal of this magnitude that allows Burger King to relocate its tax base to Canada costs the company dearly in leverage and in the court of public opinion. The company financed $12.5 billion of the transaction not covered by stock swaps, including $3 billion in preferred equity financing from celebrity investor Warren Buffett’s fund Berkshire Hathaway. It’s far harder to gauge how much the blowback from the tax inversion would hurt Burger King among American consumers, however. Popular outcry earlier this month pressured Walgreen’s into rethinking a similar move, and the drug store chain now says it will remain based in high-tax state Illinois, rather than move its headquarters to Switzerland after buying a Swiss company. Already, there are reports of the Treasury Department scrambling to dissuade such corporate moves, possibly with punitive new rules. Television pundit Joe Scarborough, certainly no liberal like me, mused on “Morning Joe” on Monday that Americans ought to show their displeasure with Burger King’s tax evasion by boycotting its burgers. Maybe some customers would vote with their feet, but it probably wouldn’t hurt Burger King that much, at least not any worse than Chick-fil-A’s publicized view against marriage equality drove away a portion of consumers. Ultimately, chasing lower tax rates is not a motivating factor I would prescribe to many companies for their M&A strategies, because it leads to a race to the bottom that doesn’t necessarily position a brand any better with consumers. A Canadian company like the new Burger King could probably find lower corporate taxes in Europe or Southeast Asia in a few years, but how is it going to get there? How much would that tax savings cost the brand in debt and bad publicity? A lower tax rate is certainly one of the benefits of Burger King’s merger with Tim Hortons, and the way for the company to prove definitively that this deal is not just a tax dodge is to show its proposed dual-brand growth quickly.