DBRS Places Tim Hortons Under Review with Negative Implications

DBRS has today placed the ratings of Tim Hortons Inc. (THI or the Company) Under Review with Negative Implications following the Company’s announcement that it has reached a definitive agreement under which it will be combined with Burger King Worldwide Inc. (Burger King), creating the third-largest quick service restaurant business in the world, with $23 billion in system sales from over 18,000 restaurants in 100 countries.

The transaction is expected to be completed with the creation of a new parent company, based in Canada and trading on both the Toronto Stock Exchange and the New York Stock Exchange. The new parent company will own both Burger King and THI. Each outstanding common share of THI will be converted into CAD 65.50 in cash and 0.8025 of a common share of the new parent company. Shareholders of THI will have the right to elect to receive alternative all-cash or all-share payments. All Burger King shares will be converted into shares of the new parent company. Pro forma the transaction, 3G Capital will own at least 50.1% of the new parent company.

Burger King has obtained commitments for $12.5 billion of financing to fund the cash portion of the transaction, including a commitment for a $9.5 billion debt financing package comprising a $6.75 billion senior secured term loan B facility, $2.25 billion of senior secured-second lien notes and a $500 million senior secured revolving credit facility. The final piece of the financing is a commitment by Berkshire Hathaway Inc. for a $3.0 billion preferred equity financing.

DBRS notes that THI’s Senior Unsecured Debt contains a change of control trigger provision that requires the occurrence of both a change of control and a rating event (i.e., downgrade below investment grade). If triggered, the provision requires that an offer be made to repurchase at a price equal to 101% of the outstanding Senior Unsecured Debt of the Company.

The Under Review with Negative Implications placement reflects the view that the expected material increase in consolidated financial leverage that would result at the new combined entity, will likely outweigh possible benefits to its business risk profile. Consolidated financial leverage is expected to increase notably due to Burger King’s higher financial leverage (relative to THI), as well as the material debt likely to be incurred in order to complete the transaction. DBRS is therefore concerned that THI’s credit risk profile will no longer be consistent with an investment grade rating.

In its review, DBRS will focus on (1) the combined entity’s corporate/capital structure; (2) assessing the business risk profile of the combined entity, including potential benefits from enhanced scale and geographic diversification, as well as the risks associated with the integration and realization of potential revenue and cost synergies (from accelerated international growth, global scale and sharing of best practices); and (3) the financial risk profile and long-term financial management intentions, including any deleveraging plans.

DBRS will proceed with its review as more information becomes available, aiming to resolve the Under Review status by the closing of the transaction.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodology is Rating Companies in the Merchandising Industry, which can be found on our website under Methodologies.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.