A Tim Hortons franchise stands next to a Burger King outlet in a Toronto food court on Aug. 25, 2014.Chris Young/The Globe and Mail
The board of Tim Hortons Inc. squeezed more money and more concessions out of Burger King Worldwide Inc. after deftly defusing what was evidently a real risk that Burger King would try a hostile bid as negotiations dragged on during the summer.
The chain of events revealed in the takeover circular filed yesterday shows that there was a point where Burger King was clearly in a position to try a hostile bid after Tim Hortons rebuffed the U.S. burger chain twice.
It doesn't seem that Burger King ever overtly rattled the saber of a hostile bid, according to a person familiar with the negotiations. But by late June, with the third offer on the table, it was clear to Tim Hortons' board of directors that if they blew off Burger King yet again they would be taking a real risk that the U.S. company would go directly to shareholders.
That's because the offer that Burger King tabled in late June was significantly different than the two earlier bids that Tim Hortons had rejected out of hand.
Burger King's opening bid in late March was $73 a share. At that point, the offer represents roughly a 22-per-cent premium over the $60 a share Tims is fetching on the Toronto Stock Exchange. Details are sketchy and while Burger King has lined up equity financing from Warren Buffett, the company does not yet have debt financing solidified.
Burger King can't be surprised to get a cold shoulder. It's the start of a dance.
So six weeks later, on May 12, Burger King tries again at $78. The premium is now 30 per cent over the market price. Tim Hortons comes back with another no. Burger King asks to come and make a presentation to the Tim Hortons board. Tim Hortons declines the offer.
Then on June 27, Burger King comes back with a much bigger offer that now must make the board of Tim Hortons realize that if it says no again, there is at least the risk of Burger King trying a hostile deal.
There are a number of clues to this in the circular. For one, the price is now $82.50. That's approaching a premium of 40 per cent. Even if the Tim Hortons board thinks the company is worth more, that is the kind of premium that is going to win over a lot of shareholders.
What's more, Burger King "noted" in its bid letter that it was ready to make some commitments to Canada, including pledging "the combined company following the transaction would be incorporated in Canada, have a new name reflecting both companies' rich heritages, maintain separate brand management for Tim Hortons, maintain Tim Hortons headquarters in Canada and continue to support Tim Hortons commitments to the communities it serves." Those are the kinds of commitments that Investment Canada – i.e. the Harper government – would want to hear.
In addition, Burger King signalled that the bid was now fully financed with commitments for all the necessary cash. This is key because under Canadian law, a hostile bid can only be made if the acquiror is fully financed.
And finally, Burger King noted it was ready to get to work right away.
Tim Hortons has to know it is in a danger zone. So it's at this point the company starts talking. Instead of a flat no, there is a willingness to engage and talk more. There are other reasons too, as the price is now getting so compelling that directors must do their fiduciary duty to shareholders and learn more about what Burger King is thinking. If shareholders ever heard that Tim Hortons flatly rejected an offer like this, there could be big repercussions.
And there's one last canny play for the target. Tim Hortons asks for a three-month standstill agreement from Burger King, precluding any hostile bids in that time, and gets it as quid pro quo for starting talks.
At this point, Tim Hortons is reaching the end of its second quarter and management knows it's going to be a good one when the final numbers are tallied. If the Tims board can stretch out the talks beyond the earnings announcement date, it will likely get a pop in Tim Hortons stock that will help the target's negotiating position.
That's exactly what happens on Aug. 6, when the results are made public and the stock jumps 14 per cent. The Tim Hortons side reaches out shortly after to Burger King and demands a "substantially" higher offer, as well as asking that Burger King "clarify or provide additional detail about the commitments it was prepared to make in respect of other stakeholders, including those it was prepared to make to demonstrate its commitment to the franchisees, employees, guests, communities and Canada, as previously had been discussed in more general terms in its proposal."
And Tim Hortons gets what it wants. Later that month, the final bid of $88.50 is on the table, and a friendly deal is done.
There are plenty of reasons that Burger King would not have wanted to go hostile. Such deals are messy, create acrimony with the target, and it would have raised the potential of interference from the Canadian government had Tims tried a nationalism defence. A friendly deal with Tims working to defuse such issues would have always been preferable.
But the timeline makes clear that Tims pushed very close to the line of daring Burger King to at least consider a hostile deal, and did it in such a way to drive significant extra value for shareholders.