Burger King’s Tax Dodge is Just the Latest of Its Restructuring
Schemes
By Phil Mattera, Dirt Diggers Digest
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Nothing says America like hamburger chains such as Burger King,
yet the fast-food giant is the latest company to put tax dodging above national
loyalty.
The home of the Whopper wants to carry out one of the so-called
inversions that are all the rage among large U.S. corporations. Burger King is
proposing to merge with the much smaller Canadian doughnut and coffee chain Tim
Hortons and register the combined company north of the border, where it would
be able to take advantage of lower tax rates on its U.S. revenues.
An interesting twist is that a large part of Burger King’s
financing for the deal is coming from Warren Buffett, who apart from
his investment prowess is known for his statements calling on the wealthy
(individuals, at least) to pay more in federal taxes.
While many are criticizing Buffett for hypocrisy, the sage of
Omaha seems to be taking refuge behind Burger King’s claim that the deal is not tax-driven but
is instead a growth opportunity. That does not pass the laugh test, but it is
true that Burger King has been willing to submit to frequent restructuring in
its never-ending quest to emerge from the shadow of its much larger rival
McDonald’s.
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In its 60-year history, Burger King has undergone many changes.
In 1967 founders James McLamore and David Edgerton sold the chain to the flour
giant Pillsbury, which for two decades struggled to find the right formula for
the company.
In 1989 Pillsbury was taken over by Britain’s Grand Metropolitan,
which continued the ceaseless experimentation. After Grand Met merged with
Guinness to form Diageo, Burger King did not fit well with a global company
focused on alcoholic beverages.
In 2002 the burger chain was taken over by private equity firms
Texas Pacific Group (now TPG Capital) , Bain Capital and Goldman Sachs Capital
Partners. After they extracted what they could from the company, the buyout
firms arranged for an initial public offering that would allow them to profit
even more.
Four years after the IPO, the chain was taken over by another
private equity firm, 3G Capital of Brazil. After only two years, 3G took a
portion of Burger King public again. Now 3G, which partnered with Buffett on
the takeover of H.J. Heinz, is at it again with the Tim Hortons deal.
One thing that is clear from this history is that Burger King is
not, in fact, a purely American company. But that doesn’t legitimize the
Canadian inversion. All it shows is that Burger King’s problems predated the
Tim Hortons deal.
The chain has gone through a dizzying series of ownership
changes that have probably done little to help its underlying business. And
there’s also the issue of how that business is structured. As the Wall
Street Journal points out, Burger King is essentially an
“assetless company.” It owns less than 1 percent of its nearly 14,000 worldwide
outlets, with the rest in the hands of franchisees.
This means that the company is largely removed from the
day-to-day operations of its outlets and is instead focused on the royalties it
collects from the franchisees. This means that it, even more than other
fast-food chains, can claim to be uninvolved in controversial matters such as
wage rates and other employment practices.
That posture may no longer be tenable. The recent ruling by the
National Labor Relations Board holding McDonald’s jointly liable for labor and
wage violations by its franchise operators may very well be applied to other
chains.
For decades, Burger King has been treated as a pawn in the
financial machinations of global corporations and buyout firms. Now its owners
want U.S. taxpayers to help underwrite the latest scheme. Hopefully, they won’t
get their way this time.