Shares of Canadian coffee and doughnut chain Tim Hortons and U.S. fast-food company Burger King Worldwide Inc jumped on Monday after news that they are in merger talks that investors and analysts said were spurred in part by Canada's attractive tax policies.
The companies, whose market values are comparable in size, confirmed late on Sunday that they were discussing a takeover of Tim Hortons by Burger King. They said the new entity would be based in Canada, which has a lower corporate tax rate than the United States, especially for entities with large amounts of earnings from overseas.
Investors and analysts cheered the possible deal, saying it has many benefits for both companies.
"The deal would be structured as a tax inversion, which could see a more favorable treatment for Burger King's foreign profits and create the third-largest global quick-service restaurant player," Scotiabank analyst Patricia Baker said in a note to clients.
Shares of Tim Hortons were up nearly 20 percent at $75.23 on the New York Stock Exchange, while Burger King, which is majority owned by investment firm 3G Capital, rose more than 17 percent to $31.83.
"If Burger King can export itself to Canada, I understand the tax savings are in the order of 13 percent," said David Baskin, president of Baskin Financial Services, which controls about 180,000 shares in Tim Hortons. "So that's got to be a win for the Burger King shareholders."
Miller Tabak analyst Stephen Anderson said he did not expect any antitrust hurdles since the chains serve different quick-service segments, but he cautioned that the proposed deal could face political backlash on both sides of the border.