3G’s Burger King ‘comfortable’ with 7x leverage in Tim Hortons deal

  • Burger King lines up $9.5 billion debt financing package
  • Berkshire Hathaway commits $3 billion of preferred equity financing
  • 3G Capital’s New York-based executive Alex Behring oversees deal

“We feel that we have a very balanced capital structure given the highly cash flow generative nature and similarity of the two businesses,” Burger King CEO Daniel Schwartz said on a conference call with analysts to discuss the deal. “We’re quite comfortable with where we are.”

Breaking down the capital stack of the post-merger Burger King, Schwartz said the debt multiple on the deal comes to about 5x EBITDA for a $9.5 billion financing package led by JPMorgan and Wells Fargo, plus about 2x EBITDA for a $3 billion of preferred equity from Warren Buffett’s Berkshire Hathaway that will accrue a 9 percent coupon. Schwartz said the preferred stock portion “isn’t exactly leverage” but he still added it in during his debt multiple comments, which were prompted by a question from an analyst at TD Securities.

Miami-based Burger King’s debt financing for the deal will include a $6.75 billion in senior secured term loan B facility, a $500 million senior secured revolving credit facility and senior secured second-lien notes totaling $2.25 billion, according to a prepared statement. 3G Capital will own 51 percent of the combined firm after the deal closes, which is expected by early 2015.

“We’ll be out in the markets in the coming weeks with respect to the financing and we would expect the term loan to be right in the range of where market is today,” Schwartz said.

For Brazil-based 3G Capital, the deal marks at least its third major acquisition in North America after a founder of the firm, Jorge Paulo Lemann, built up InBev by merging with Anheuser-Busch in 2008. 3G bought Burger King for $4 billion in 2010, and teamed up with Berkshire Hathaway for the blockbuster $23 billion Heinz take-private deal last year.

New York-based Alex Behring, co-founder, managing partner and board member of 3G Capital, also serves as executive chairman of Burger King Worldwide.

“By bringing these two iconic brands under a single powerful platform, we will be able to create more value than either company could deliver on its own,” Behring said on a conference call. “We plan to take the beloved Tim Hortons brand that has such a rich heritage here in Canada to the rest of the world, following a proven international growth model that we pioneered at Burger King.”

Behring and Buffett both defended the tax inversion aspect of the deal, which drew criticism for avoiding U.S. taxes.

Behring said Burger King’s effective tax rate will remain in the mid- to high 20 percent range after the corporate headquarters moves to Canada and that the transaction will not generate significant tax savings.

Buffett told the Financial Times that more of the combined company’s profits will be generated in Canada. “Tim Hortons earns more money than Burger King does,” Buffett told the newspaper. “I just don’t know how the Canadians would feel about Tim Hortons moving to Florida. The main thing here is to make the Canadians happy.”

While Buffett has issued many critical remarks on private equity over the years, he described 3G Capital’s Lemann as a friend in his 2013 letter to shareholders and said at the conglomerate’s annual meeting in May that he would welcome the chance to work with 3G Capital again.