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Merger With Tim Hortons To Boost Burger King's International Growth Plan

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Burger King Worldwide delivered strong results in its third quarter earnings report on November 4. The company reported a strong 2.4% year-over-year (y-o-y) increase in its global comparable store sales and a 7.7% y-o-y increase in the system-wide sales (constant currency). This was the company's best quarterly performance in terms of comparable store sales in North America since 2012, primarily driven by impactful new product offerings and the value menu. On the other hand, Burger King continued its expansion plan for a wider global footprint, as the burger chain merged with the Canadian multinational fast-casual restaurant chain, Tim Hortons  in August.

The company's Q3 revenues grew 5% y-o-y, partially driven by 5% net new store development. All the geographical segments delivered double digit organic growth. Burger King's 100% franchised model has been successful in widening its margins over the last couple of years. In the third quarter, the company's adjusted EBITDA margins increased 570 basis points to 69.7%.

We have a price estimate of $28 for Burger King, which is about 15% below the current market price.

See full analysis for Burger King

Tim Hortons Merger Deal To Strengthen Burger King's Position In the Industry

In the last week of August, Tim Hortons and Burger King Worldwide entered into an agreement under which the two recognized companies joined hands to create the world's third largest quick service restaurant company. With a combined system sales of $23 billion, the new company will now have over 18,000 restaurants in around 100 countries. The company will be headquartered out in Canada, where corporate taxes are lower as compared to the U.S. (See Burger King-Tim Hortons Cross-Border Merger Much More Than Tax Inversion)

After the completion of the transaction, each common shareholder of Tim Hortons will be entitled to receive either of the given options:

  • C$65.50 in cash and 0.8025 newly issued Holdings common shares per common share of Tim Hortons.
  • C$88.50 in cash for each Tim Hortons common share held by the shareholder, or
  • 3.0879 newly issued holdings common share per Tim Hortons common share.

The company has updated its transaction details in its quarterly SEC filing. We have discussed the details of the merger deal in detail in our prior article. (See Burger King-Tim Hortons Cross-Border Merger Much More Than Tax Inversion)

Tim Hortons, known for its coffee and doughnuts, has dominated the Canadian fast food industry with 4,546 system-wide restaurants spread mainly across Canada and the U.S. The company reported a 10% increase in net revenues year-over-year (y-o-y) in Q3 2014, while the same store sales growth was 3.5% in Canada and 6.8% in the U.S., primarily driven by an increase in average spend per customer visit. This deal fits perfectly with Burger King's business model, where the burger giant focuses more on international expansion and menu innovation.

Quick service restaurants (QSRs) are facing stiff competition in the breakfast category, with coffee being the major driver. Tim Horton's versatile food offerings for the breakfast segment might help Burger King compete against the likes of McDonald’s, Dunkin' Brands and Starbucks. Tim Hortons has quite a significant brand appeal in the U.S., and the Burger King?s merger with Tim Hortons might further improve the customer base. The merger will not only provide a boost to the revenue growth, but also help them in penetrating the Canadian market as well. Burger King has more than 7,000 restaurants in the U.S., leaving them with a little expansion growth in the domestic market. With around 280 restaurants in Canada, Burger King might look to expand its customer base in that region.

Burger King Targets Lucrative Markets For International Growth

The company opened 152 net new restaurants in the third quarter, taking the total count to 13,960 restaurants. However, as per the trend, Burger King's expansion process picks up pace in November and December. Nearly 400 new net store openings occurred in the fourth quarter for the last 2 years. The company opened 701 net new stores in the last 12 months, making it the highest growth period of the company. In the last 12 months, the company opened 341 net new stores in Europe, Middle east and Africa, 161 net new stores in Latin America and 235 stores in Asia-Pacific.

With a wide presence in nearly 100 countries, the company is now trying to target those markets, which are untested and have high growth potential. One of these markets is India. The company mentioned that it is planning to open its first store in India, with the all new vegetarian WHOPPER. The company has already started its pre-order initiative in India, with 1,200 burgers already sold on-line for nearly Rs 128 (approx $2). In India, people with average disposable incomes constitute a wide range of population. This middle section of the society is the target area for these fast food joints. With its brand appeal and its innovative tempting value meals, the company will find it comparatively easy to penetrate the market and might attract customers in huge numbers. Moreover, in a developing nation like India, the concept of fast-casual dining is not so prominent, unlike in the U.S. This is an added advantage for a fast food chain, as the fast food segment has been facing huge competition from the fast casual segment in the more developed markets.

Apart from this, Burger King returned to France when it opened its brand new store at the Marseilles airport in 2012. This was followed by another restaurant near Reims. Following its success in these stores, the company announced that it will open 350-400 restaurants throughout this burger loving country.

The primary focus of the company is to drive its customer base, as the entire QSR industry is witnessing a decline in customer traffic. Expansion in countries with a huge fast-food loving customer base, might provide a huge boost to its revenue stream.

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