August 26, 2014
Warren Buffett has been a vocal supporter of higher tax rates for the wealthy but when push comes to shove the Oracle is all about the bottom line. As you know yesterday Burger King (BKW) shares soared when word leaked of a potential tax inversion – inspired bid for Canadian donut shop Tim Horton’s (THI). Now it’s being reported that the deal will be funded in part by Buffett’s Berkshire Hathaway (BRK-A, BRK-B).
The Wall Street Journal says Berkshire will put $3 billion into the $10 billion bid for Tim Horton, likely in the form of a purchase of preferred shares.
So what’s in this for Warren? Billions. This isn’t about taxes, but endorsements and relationships. Burger King’s majority owner is 3G, a Brazilian PE firm led by 74 year old billionaire Jorge Paulo Lemann. Last year 3G and Berkshire partnered to buy Heinz. Berkshire laid out $8 billion for preferred shares that will pay back $1 billion a year and another $4.25 billion for Heinz common stock. There aren’t any terms being leaked on this BK deal yet but Buffett has never been shy about demanding a premium. Expect Berkshire to get at least 10% on the $2.5 billion investment.
Still this is small potatoes for Berkshire which is sitting on more than $55 billion in cash at last count. The real reason Buffett has to be involved is to protect Berkshire’s 9.1% ownership interest in Coke (KO). Burger King is married to Heinz but its drink business is up for grabs. 3G has already pushed for a switch to Pepsi (PEP) in Latin American markets. With earnings flat since 2011 Coke can little afford to lose soda market share, let alone miss growth opportunities for Coke’s non-carbonated products. Right now BK sells Nestle’s bottled water. While a switch to Coke’s Dasani probably won’t be explicitly part of this financing package let’s just say Berkshire’s involvement doesn’t hurt.
As a kid Warren Buffett bought six packs of Coke for a quarter then sold them to his friends for a nickel apiece. He now owns 9% of Coke, half of Heinz and seemingly all of the U.S. financial system. Buffett is the American Dream. He’s a modern day Ben Franklin and he’s not going to give up billions just because the President calls him names. Does that make Buffett a craven sell-out or does it validate U.S. corporate tax avoidance? Maybe a little bit of both. Ultimately it’ll be consumers and voters who decide. As it stands, Buffett is much more popular than Congress or the President.
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