Burger King (BKW) shares surged more than 16% Monday to set a new 5-year high on news the fast-food giant and Canadian coffee chain Tim Hortons (THI) are in talks to complete a merger that would create the third-largest fast food restaurant company in the world.
The two companies said in a joint statement that the new entity would benefit “from shared corporate services, best practices and global scale and reach,” especially in leveraging Burger King’s international experience to accelerate Tim Hortons growth in international markets. But a Wall Street Journal report late Sunday, said the true motivation of the deal is likely tax inversion – a strategy that in the case of Burger King will allow the company to change its tax domicile to Canada, the home of Tim Hortons, and save millions by switching to the favorable 15% corporate income tax rates there, versus that of 35% in the U.S.
Unlike federal regulators, investors seem to like the idea as Tim Hortons shares are up more than 12 points to $75.05, and Burger King’s rose 17.20% to $31.85. Each company’s shares have gained about 34% and 59% y/y, respectively.
The chart below shows where BKW, which currently trades with a trailing-12 P/E ratio of 44.19 and a forward P/E ratio of 27.86, has traded over the past year, with the 50-day and 200-day moving averages included.