Sunday, August 31, 2014

USA loses Burger King BKW & Petro Dollars first rouble oil shipment, Tim Hortons Merger Good For Loonie, gold demand

On August 27 rumblings of a Burger King corporate inversion made the headlines but its significance is far outweighed by another event that transpired the same day:  Russia's Gazprom OGZPY ships the first tanker of oil (80,000 barrels) ever to be sold internationally in a currency other than the US dollar.  The destination ? China via the Siberian Pacific Ocean pipeline connection.

A Sign Of Things To Come - veering away from Petro Dollars

In addition to this, two other shipments headed for Europe are also reported to involve roubles.  If you don't have roubles don't fret - Gazprom also accepts Chinese Yuan !  It's unclear as to whether or not this move was made in response to recent sanctions since China and Brazil are also attempting to do the same thing.

Russian Rouble forex rate falls to Record Low

On August 29 the rouble fell to 37:1 versus the US dollar, the lowest exchange rate seen since the Russian currency was restructured in 1998.

America Continues To Lose Big Name Companies - Burger King a Canadian Restaurant Chain ?

The second last weekend of the summer couldn't have ended soon enough for Burger King BKW and InterMune ITMN - mergers and acquisitions

California based InterMune a leader in therapies targeting lung conditions, was acquired by Switzerland's Roche RHHBY for $8.3 billion.
The same day it was also announced that Burger King is in talks to buy Tim Hortons THI in a corporate inversion - merged company uses the move to change country of domicile - New Canadian headquarters presumably will be in Oakville.

Oakville has the sixth-lowest business tax rate among two-dozen Greater Toronto Area municipalities, will be scouted as a potential location.  Last year, federal and state income taxes represented 34% of profits at Burger King.

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One is acquiring the other for $11.4/$C12.5 billion ($3 billion in finance from Berkshire Hathaway gives it a preferred stake which pays a higher dividend yield) or $94.05 per share - $65.50 in cash and 0.8025 per share of the new company for each share they own

... however, Canadian taxes may not be the issue

Daniel Schwartz, Burger King’s C.E.O. added, “We don’t expect there to be meaningful tax savings, nor do we expect there to be meaningful changes to our tax rate.”  Last year Tim Hortons effective tax rate was virtually the same as the US rate of 27.5%.

Other reasons why the company is relocating - Two-thirds of the combined company's revenue will come from Canada, with 20% from the U.S. and 13% from the rest of the world.  Tim Hortons is underleveraged meaning they can borrow against those assets -> this will enable the new company to make even more acquisitions !  

What allows BKW to transfer its headquarters to Canada is thisunder US tax law, if the US company transfers more than 20% of its shares to the foreign firm it can switch its tax jurisdiction.

The Canadian corporate tax rate of 26% compares favorably to the 35% rate stateside - last year Burger King paid a rate of 27%.  Canada has the second lowest tax rates in the G7.  "total tax costs are up to 40% lower in Canada versus the USA".   you see, overseas income is only taxed when it's brought back to the country of domicile.

Burger King is undergoing tremendous growth abroad, something that Tim Hortons has been trying to do over the last few years, unsuccessfully - 859 of the 879 non-Canadian locations are in the United States.
BKW is the larger of the two brands (13,000 restaurants vs 4600 Tim's) but the bulk of its restaurants are franchised, meaning corporate revenue isn't as strong as it is at Tim Hortons (for instance Burger King Canada is not even a part of the company ! it was sold by 3G Capital back in 2013).  Although BKW net earnings doubled last year (117.7-> 233.7 million) it has yet to match that of Tim Hortons ($424.37 million, up 5% in 2013).

After the deal is completed, Burger King can leverage Tim Hortons ability to tap the breakfast, coffee and snack market, making it more competitive with McDonald's.

Tim Hortons THI has always been a great investment - company brass have always been open to partnerships with other fast food industry players.  Previously they were involved Cold Stone Creamery and before that, Wendy's.   Some say that the ice cream partnership didn't work out (cost Tim's $19 million to terminate the deal but it did last a few years) however if done right, this one could actually work !
Brazil's 3G Capital will be the company's largest shareholder (51% of combined company; was 70%  pre-merger).  3G also controls iconic Canadian beer maker Labatt Breweries.

Last year Burger King increased international locations by 1493 with 124 new stores in Europe, Asia last quarter alone !  Same-store sales in China beats McDonald's which is a grrreat sign !  Don't forget the deal Timmy's already has in place with investors in the Gulf region - promises to deliver another 120 new Tim Hortons locations to the Gulf.

The two companies do operate a bit differently:  94% of Tim Hortons locations are corporate owned versus only 0.4% for Burger King (down from 11%).  Nevertheless, BK continues to increase earnings (doubled in 2013) as the number of franchisee owned locations grows at a torrid pace.

commentary:  this is great news for Canada !  it doubles the corporate tax collected from Tim Hortons and gives the iconic brand an opportunity to expand overseas.  Also, Burger King ranks among the fastest growing international fast food franchises.  Thumbs up to Stephen Harper who has been adamant in cutting the corporate tax rate for the better part of a decade.  Tax rate may be lower but Canada will be getting millions more next year because Burger King just moved to town !

Burger King added 142 new stores in the last 3 months in Europe and Asia only !!  ALL of its growth is coming from outside the USA, and it's that growth that gives it shareholder value.  1000 new stores in 2013 at the same time net earnings DOUBLED.  Before it ventured outside the US borders the company was doing very badly, losing money every year and bordering on bankruptcy.  Yes it had thousands of stores but it was not able to grow or turn a profit until a Brazilian company bought it and turned it around.

Gold Demand Down 16%, Jewelry Down 30% 

In the three months ended July 31, 2014 demand for gold plunged 16% (1148.3 tonnes -> 963.8 tonnes) thanks to lower jewelry sales (lowest quarter in 1.5 years).    In China, falling demand for gold jewelry (-45%) and gold bullion (-56%) has made India the largest purchaser of gold by default.  Overall, quarterly jewelry demand is now at 509.6 tonnes (China demand  -45% India -18%), gold bars demand -57% to 212 tonnes, gold coins -50% to 46.3 tonnes.  3-month demand by country: India 204.1 tonnes -39%, China 192.5 tonnes -52%.

But Central banks keep buying Gold

+117.8 tonnes in the second quarter +28% (added 409 tonnes 2013 full year).  Russian gold producer Polyus Gold POLG led all gold companies in bulking up its hedging position (protects against future price decrease).

Canada's economy becomes even more diversified !

Canada is home to major companies in the aerospace industry, oil and gas, technology (BlackBerry), banking, insurance (Manulife, SunLife, Great West Lifeco, Intact), software (CAE Inc), cinema (imax), mining (gold), auto (Magna), pharma (Valeant), media (Thomson Reuters), aerospace (Bombardier), rail (home to 2 of the 4 biggest railway companies in the world), and now fast food !
If you're a forex trader, this bodes well for the Canadian dollar - for instance, when the BKW announcement was made, the loonie pushed higher on financial markets - that's because Burger King will need to buy Canadian currency to close the deal.

Canada's stock exchange also stands out - as of January 2014 only five countries have a stock exchange bigger than the Toronto Stock Exchange, which ranks 8th in size (9th in terms of trade volume).


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