For our Art of the Deal feature, we take a retrospective behind-the-scenes look at Canada’s biggest M&A deal last year and how Burger King had to let Tim Hortons have certain things its way to clinch the deal
Utter the words “3G Capital” to executives of the world’s top food or drink makers these days, and if you look closely you may notice an involuntary shiver.
Founded in 2004, the multi-billion-dollar Brazilian global investment firm has a ravenous appetite for mega-mergers. 3G has cut a swath through the international food and drink industry the way loggers have chopped through Brazil’s Amazon rainforest. 3G acquired Burger King in 2010 for close to US$4 billion. In 2008 it gulped down Budweiser when it merged the world’s largest brewer, InBev, with Anheuser-Busch for US$52 billion. In partnership with Warren Buffett’s Berkshire Hathaway, 3G bought H.J. Heinz for US$23.6 billion in 2013. If 3G eyeballs your company for take-over, you might as well say “timber.”
Fortune magazine has described 3G as “cutthroat” for how it slashes costs and employees once it nails a company and strives to increase profitability. When 3G got Heinz, it eliminated 7,000 of Heinz’s 31,900 jobs in two years. Oh, and to save a few more dollars, it took away the mini-fridges in Heinz’s executive offices. Analysts call it the “3G way.” One might wonder if those Gs might stand for Guts, Gutting & Glory.
This was the spectre Tim Hortons suddenly faced when President and CEO Marc Caira was contacted by Burger King’s financial advisory firm on March 10, 2014. They suggested a follow-up chitchat with Caira about Tims’ future in the global QSR (Quick Service Restaurant) world. Two days later they called again, uttering the words “Burger King” and “3G” into Caira’s ears.
Five months of hardball negotiations later, that call would lead to the biggest M&A deal in Canada last year: Burger King Worldwide acquired Tim Hortons for $12.5 billion. The deal would create a new holding company headquartered in Canada, Restaurant Brands International, which would own both brands. 3G would own 51 per cent of RBI, now the world’s third-largest quick service restaurant (QSR) company with 18,000 restaurants in 100 countries and about $23-billion annually in system sales.
Prior to Tim Hortons, Caira had been Global CEO of Nestlé Professional and, before that, President and CEO of Parmalat North America. He’d been made CEO of Tim Hortons in July 2013, just eight months before 3G/BK came calling.
As Vice-chair at Osler, Hoskin & Harcourt LLP and lead external counsel on the intense negotiations that would unfold over the next five months, Clay Horner had better than a ringside seat. He was right in the ring. Working closely with Tim Hortons’ Executive Vice-president, General Counsel and Corporate Secretary Jill Sutton, he would advise and represent the interests of Tim Hortons’ board.
Right off the bat the board had Caira pour hot coffee all over 3G’s designs. First, says Horner, Caira made it clear that Tims was simply not for sale. As Horner relates it, the board’s message was: “We are doing very, very well, thank you. We have a business plan we are very committed to. We are not looking to do a transaction.”
Secondly, adds Horner, “when you become the CEO of a big company and you’ve been there less than a year, you have a strategy and a plan.” While Caira had to be mindful of his fiduciary duties – meaning he couldn’t just ignore a juicy price offer if Burger King made one to Tim Hortons’ shareholders – Caira “really didn’t take this job with a view that [he’s] going to sell the company a year later.”
Those three words – NOT FOR SALE – would, like a crowbar, help Tim Hortons repeatedly pry up the ante for Burger King and 3G in the ensuing negotiations. Not only would they help propel Burger King’s initial price offer on March 24, 2014 of $73 significantly higher on several occasions, they would add, like sprinkles on a donut, a lengthy series of demands to preserve Tim Hortons’ position as a honey-glazed icon of Canadian culture.
Tims’ board and legal advisors made it clear they would check Burger King right over the boards and halt even preliminary talks in order to protect its relationship with franchisees, keep its headquarters in Canada, preserve as many jobs as possible and, well, the list just went on. Before Tims would invest time exploring a transaction, explains Horner, Burger King, “would have to do something very compelling for us to decide to part from our business plan that we think will create serious value.”
Burger King knew that long before.
Smart Cookies — With Fries
Burger King’s President and CEO, Daniel Schwartz, is the boy wonder of the 3G way. Just 34, the Cornell University graduate who majored in management and applied economics is one of the youngest CEOs ever of a major non-tech US company. He’s worked at various executive positions since joining BK in 2010.
When he got the top job in 2014, he spent months flipping burgers, cleaning bathrooms and working the drive-through window at a Miami Burger King to get a better handle on how the restaurants operate. The chain – with 13,960 outlets at latest count – had long needed improvement.
In 2005, Schwartz, then 24 and a bank analyst, heard 3G was opening a New York office and applied for a job. 3G’s founders, including Jorge Paulo Lemann, a former tennis champion, banker and Brazil’s richest man with US$25 billion, saw promise in Schwartz, who embraced 3G’s zeal for corporate thrift. Making him a partner in 2008, it was Schwartz who largely engineered 3G’s 2010 Burger King acquisition.
“Burger King is an exceptional client and they are very, very intelligent,” says William Sorabella, a New York partner with Kirkland & Ellis LLP. Sorabella, with then-colleague Stephen Fraidin (each has twice been named one of American Lawyer’s “Dealmakers of the Year”) worked closely with BK’s General Counsel Jill Granat on the deal. (Fraidin, who was co-lead counsel, has since become Vice-chairman of Pershing Square Capital Management.)
It was in early 2013 that Burger King Worldwide’s board and senior management decided to seek out mergers with other restaurant chains as part of its five-year strategic plan. And they smelled the potential of Tim Hortons’ “Always Fresh” coffee and the rest of its menu. They felt they could take the Canadian chain global and turn Timbits into big bucks.
On a per capita basis, Oakville, Ontario-based Timmies is more prominent in Canada than Starbucks is in the United States, with more than twice the number of Tim Hortons restaurants in Canada per 100,000 people than Starbucks has in the US. Tim Hortons sells nearly eight out of 10 cups of coffee sold in Canada. It holds 62 per cent of the Canadian coffee market compared to Starbucks’ second-place position at 7 per cent.
Schwartz and a small BK/3G team had quietly done their homework on Tim Hortons well before assembling an external legal and financing deal team and making contact with Caira, says Sorabella. “They always are incredibly well prepared. So when they called us at Kirkland, they were aware of the primary issues that were going to have to be addressed. They were well aware of the strength of the brand. They were well aware of the importance of Tim Hortons for Canada. And they were very well aware of the regulatory approvals that would be necessary.”
Ah, regulatory approvals. In this case, that meant the sometimes politically malleable Investment Canada Act (ICA). To a company based in the US, where there’s really no equivalent legislation, that meant finding a top Canadian law firm to instruct Burger King on the finer points of the Act. And, just as importantly, the political dynamics that might grease – or fry – a potential deal.
BK settled on Davies Ward Phillips & Vineberg LLP. A team of 16 lawyers was led by Patricia Olasker, a senior partner in the Corporate/Commercial, Mergers & Acquisitions practices in Toronto. This would be her biggest role on the biggest deal of her career thus far. George Addy, who heads Davies’ Competition & Foreign Investment Review practice, would handle BK’s plunge into the ICA.
One of Davies’ first steps, despite Burger King’s preparations to this point, was, explains Olasker, to give them “an understanding of what Tim Hortons represented in the Canadian environment. Which, if you were sitting in Brazil, or even New York, you might be surprised to hear. You think it’s just donuts and coffee. You don’t realize actually it’s the soul of the country.”
That made Burger King’s intentions to buy Tim Hortons a touchy subject — not only with politicians, but with consumers, and, of course, Tim Hortons’ shareholders and thousands of franchisees. Tim’s, Canada’s largest QSR chain, has 3,773 Canadian restaurants, another 892 in the US, and 59 in five other countries. Most are owned by franchisees.
Yet, Addy notes, despite Tim’s “iconic nature” and maybe an instinctual desire to protect it from outsiders, the ICA clearly indicates Canada benefits when foreign companies make large capital investments here or bring technological benefits to Canada, provided those don’t threaten national security. Hard to see how an American company getting its hands on our honey crullers might do that.
Schwartz, quick to grasp Tim’s sticky hold on Canada’s warm fuzzies, “was quite hands on” throughout the ICA process, says Addy. “He understands that landscapes change from one jurisdiction to the other.” Still, this deal had novel features in that respect.
“One of the prime objectives behind the acquisition was to take this Canadian icon to the rest of the world,” which would work in Burger King’s favour, reckoned Addy. “Frankly, it’s not that often that you have a case where you are able to offer that possibility and that kind of strategic plan to the Investment Canada agents.”
It was at a dinner in Toronto on March 20, 2014 that Marc Caira had his first in-person face-off with 3G. He met Alex Behring, Executive Chairman of Burger King and a co-founder and Managing Partner of 3G Capital. No terms were discussed with the scholarly but tough Behring, an electrical engineer with a Harvard MBA who lives in the hedge-fund capital of Greenwich, Connecticut.
Caira, emphasizing again that Tim Hortons was not for sale, asked for any proposals to be given in writing. On March 24, Burger King Worldwide, 3G and Warren Buffett’s Berkshire Hathaway, a 3G pal who agreed to help finance the take-over with a preferred equity stake in any deal, delivered a joint letter to Caira. It offered to buy all of Tim Hortons’ outstanding shares for $73 per share, payable in cash and stock of the combined company. Importantly, from Caira’s view, the letter stated that 3G/BK understood “Tim Hortons’ rich Canadian heritage.” That took some chill out of the air.
Nevertheless, Caira told Behring on April 25 that the offer “did not provide a basis upon which to enter into discussions with Burger King Worldwide.”
Meanwhile, things started cooking at Tims. The board created a working committee to start evaluating any further offers. Tims has a small legal department for a company its size, just 60 people. But, to prevent leaks about Burger King’s interest and thereby improperly jolt the stock market, General Counsel Jill Sutton worked practically solo during the initial months of Burger King’s probing. She wouldn’t bring in external counsel until early August of that year on a deal that would eventually be signed on August 26.
Wachtell, Lipton, Rosen & Katz, led by Adam Emmerich in New York, would act as American counsel to Tim Hortons and Osler would handle things on the Canadian end. Twenty-nine lawyers in all, not counting those who represented Tims’ financial advisors.
Osler had done a lot of tax work for Tim Hortons. But Horner, who would lead its legal team, was not so familiar with Tims’ management and board. His first priority was to quickly develop a friendly and trusting relationship with critical people in on the negotiations, then work on tactics.
“This deal is an example of great proactive thinking from a legal perspective as well as a GR [government relations] and PR perspective,” says Michelle Lally in Toronto, Osler’s Chair, Competition Law/Foreign Investment Group. She would handle the Investment Canada Act issues for Tims. “Tim Hortons is a touchy-feely brand everybody is very familiar with.” Other significant deals that wind up having anti-trust or Investment Canada issues – deals, say, in less visible areas like the concrete industry – can fly under the public radar, says Lally. “But we knew everybody would have a view about this. So you have to come out of the gate with a clear, integrated strategy.”
Have it Your Way
Tims’ board, now well aware of 3G’s hard-nosed reputation, challenged its legal teams to come up with a process for reducing any deal risk concerning clearing the Investment Canada Act. There was, says Horner, “absolutely no appetite” at Tims for announcing a deal that might not actually get done if it somehow flubbed the ICA’s net benefits test. Or if its own franchisees were so fearful about 3G’s and BK’s penchant for rabid cost-cutting one day down the road that they mobilized political support to kill the deal.
Tims wanted commitments from the buyers to ensure they would honour and protect key areas of Tims’ corporate culture, its relationship with franchisees and charitable organizations and its existing business strategy, among other things.
In addition to asking for more money, Tims and its legal advisors set down a list of core principles it wanted enshrined in undertakings to Investment Canada and in any commercial agreement and thus legally enforceable. It drew a non-monetary line in the sand for BK and 3G.
Those principles included:
- The Tim Hortons brand would be separately managed and headquartered in Canadian offices.
- Tim Hortons’ store branding would be done independently.
- Rent and royalty structure with franchisees would not be increased for five years and the buyer would indicate it had no plans to do so thereafter.
- Plans to increase the number of Tim Hortons’ franchisees in Canada would be maintained as planned.
- Maintaining the current level of staffing commitment provided to Tim Hortons’ franchisee-facing operational organization.
- BK/3G would maintain current funding and other support to the Tim Hortons Children’s Foundation, the Coffee Partnership and other charitable and community organizations across Canada.
Tims, says Lally at Osler, went far beyond what Investment Canada might demand of a foreign buyer. “For example, it’s quite unprecedented to have something that says you can’t raise prices [for franchisees] for five years. Would Ottawa have asked for that? That’s not typically something you see the government asking for; a control on pricing. So we got that in there.”
It all took some doing. It was, says Lally, searching a moment for the right words, “a challenging exercise.” Across the table when the sides met in New York on July 29 were Schwartz, Behring, Burger King’s CFO Joshua Kobza – yet another young millennial on the BK executive crew – and some legal advisors. “They were very tough,” says Lally.
At the same time, they were very sophisticated and very clear about their intentions. “But the Tim Hortons board was very resolute in its convictions about what it wanted as well.”
Just how resolute Horner made clear when he played the heavy in a “hell or high-water” call to Burger King representatives on August 20. Horner stated Tim Hortons wanted a $1-billion reverse break fee payable by Burger King if the deal crumbled because of any failure on Burger King’s part to obtain Investment Canada Act approval.
Normally, says Horner, corporations are more likely to agree to a break fee over competition or anti-trust regulations matters. With those, he explains, there’s a solid body of anti-trust law and precedents that good advisors can use to make reasonable prognostications for their clients. The ICA, however, is more a crapshoot. Getting a reverse break fee tied to it is much harder, “because, frankly,” says Horner, “of the realization that Investment Canada is a profoundly political process.”
On the other end were the lead lawyers from Davies and Kirkland & Ellis. “And they go,” recalls Horner, “ach. You have got to be crazy! They are laughing on the other side. And me, saying: ‘Don’t laugh.’”
Burger King shrugged and saw the billion as merely an opening number. They wanted Tim Hortons very badly. At this point, they had bumped up their opening bid to acquire all of Tim Hortons’ stock from shareholders several times: from the initial $73 per share to $78 on May 12 to $82.50 on June 27. Tim Hortons rejected each increase.
Over at Kirkland, the highly experienced Fraidin saw the big break fee coming and wasn’t surprised at the billion-dollar number. “We knew we had to negotiate it down. And we were pleased we were able to achieve a $500-million reduction in the breakup fee, which candidly is the biggest reduction I have ever negotiated in a reverse break-up fee.”
“Being really honest,” says Horner for his part, “that was better than we thought we’d get.” He says that $500 million is the largest-ever reverse break fee tied to an ICA approval in Canadian M&A history.
Red Bull Gives You Deals
Things were humming along now. It was August. Nobody was going to get weekends off. Forget holidays. As clients, 3G and Burger King were “incredibly demanding,” says Olasker. “They demand a lot of themselves and they demand a lot of their outside advisors. They work 24/7. That’s the culture of Burger King and 3G. As a result, everybody around them works 24/7. They set an extraordinary pace with zero tolerance for slippage or failure. But at the same time they are just the ideal client because they are smart, they are engaged and they are available.”
The lawyers on both sides were now into the heavy lifting, translating commitments BK had made to Tim Hortons’ core principles into contractual language in their commercial agreement that they would then take to Investment Canada in the form of undertakings. That would give the government measurable numbers – for example the number of front-facing Tims staff that Burger King promised to keep – which could be tracked to ensure it lived up to those commitments.
“I have never seen it done before,” says George Addy. “A lot of time was spent getting into the granular detail of converting and articulating principles into actual commitments that would be acceptable to the government.”
So much time, that at one point, says Olasker, “I remember telling my managing partner that people were starting to smell. It was really tough,” she says, laughing now.
August 24. A Sunday. Michelle Lally was driving home from Osler’s office. It was around 5 p.m. and her phone buzzed with a message. The pending deal had been leaked to the Wall Street Journal, which had called Tim Hortons and Burger King for comment on a story they intended to publish later that evening. Lally pulled a U-turn back to the office. She wouldn’t see the kids or hubby that night.
Everybody went into “extreme emergency mode” as Horner puts it. Both sides had already worked together with Canadian communications firm Earnscliffe Strategy Group to carefully craft a government relations plan. It was vital that Prime Minister Harper, Industry Minister James Moore and the relevant honchos at Investment Canada would be pre-notified about the deal before the press did. There was a leak strategy, but now, says Olasker, “Our carefully designed government outreach strategy was about to be thrown into the fire.”
Somehow Earnscliffe got to everyone before the story ran. “So no one got blindsided in a media scrum when it did come out,” says Addy.
The leak’s source was never discovered. But because of it nobody went home for days as they scrambled to get the deal done before the press went nuts. “We literally did work around the clock. And at one point, we did kind of force feed the troops Red Bull,” laughs Olasker. “It kept everyone going.” Two days later, on August 26, the deal was signed.
As a thank you for their nights and days of work, the missed vacations, the missed family events, Davies sent its legal team and their spouses to decompress for a weekend at the swank Langdon Hall Hotel & Spa in Cambridge, Ontario. As they dined on venison with spiced chocolate or heritage hen with morels and sherry jus, they wore paper Burger King crowns on their heads.
Money-wise, Burger King Worldwide paid quite a few crowns for Tim Hortons: In a combined offer of cash and new RBI shares, holders of Tim Hortons’ shares got a 39 per cent premium on their stock. Or they could take $88.50 in cash per share as an alternative.
Yet in the end, this deal was about much more than money, says Lally. Tim Hortons – leveraging the fact it was never up for sale – had remained steadfast that Burger King and 3G would not tinker with its corporate values, its cultural identity, its principles — as important as its saccharine ingredients in its recipe for success. And Burger King promised it wouldn’t — at least not for the first five years.
“Although [Tim Hortons] got an amazing price,” says Lally, mulling over the five months of sometimes “fiery” negotiations, “I think that was probably a surprise [to Daniel Schwartz and Alex Behring] that money wasn’t solving everything.”