Warren Buffett's Berkshire Hathaway is providing $3 billion of financing for Burger King's planned takeover of Tim Hortons and will earn 9 percent annual interest on the investment.
Berkshire is taking a preferred equity stake and won't be involved in managing the restaurant business, according to a statement today from Burger King. Buffett has previously injected capital into financial firms like Goldman Sachs and Bank of America at times of crisis, and helped fund deals such as Mars's purchase of Wm. Wrigley Jr. Co.
The latest transaction helps Buffett deploy some of Berkshire's mounting cash pile, which grew to a record $55.5 billion at the end of June. It also deepens his company's relationship with Jorge Paulo Lemann's 3G Capital, which controls Miami-based Burger King. Buffett teamed up with Lemann's firm last year to to take HJ Heinz private.
"3G does a magnificent job of running businesses," Buffett said in May at his company's annual meeting in Omaha.
Burger King said on Tuesday it would acquire the Oakville, Ontario-based coffee-and-doughnuts chain for about C$12.5 billion ($11.4 billion) in a deal that creates the third-largest fast-food company and moves its headquarters to Canada.
Buffett has shunned bets in publicly traded bonds with yields near record lows, preferring deals in which his reputation and the size of the cash hoard allow Berkshire to lock in better rates than those available to other investors.
He has also favored investments in food and beverage companies with well known brands. In addition to the Mars bet, in which Buffett bought $4.4 billion in bonds paying 11.45 percent interest, Berkshire controls the largest stockholding of Coca-Cola and owns See's Candies and ice-cream chain Dairy Queen.
The 9 percent rate on the preferred stake was disclosed today by Burger King Chief Executive Officer Daniel Schwartz on a conference call for investors. It compares with a yield of about 8 percent on Burger King's $791 million of 9.875 percent bonds due in October 2018, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
In the case of bankruptcy, bondholders are typically paid before preferred equity investors. Buffett didn't return a message left with an assistant seeking comment.
The Burger King deal is "a good development for Berkshire," said Tom Russo, who oversees about $9 billion including shares of Buffett's company at Gardner Russo & Gardner. 3G has a long-term approach to investing and management that works well with Berkshire's time horizons, he said.
Buffett was able to charge higher rates in the financial crisis after alternative sources of funding dried up. He got 10 percent a year on a $5 billion preferred stake in Goldman Sachs and a $3 billion bet on General Electric. Both companies redeemed the investments at a premium. Berkshire later swapped warrants it got in those deals for common stock in GE and Goldman Sachs.
In the Heinz deal, Buffett spent more than $4 billion for common equity and took an $8 billion preferred stake paying 9 percent interest. That transaction also gave Buffett warrants that allow him to increase Berkshire's stake in the Pittsburgh- based ketchup maker.
Buffett injected capital and confidence into Bank of America with a $5 billion investment announced in August 2011. The bank's stock plunged 58 percent that year amid concerns that mortgage demands would force it to issue new shares.
As part of that investment, Buffett's firm received preferred stock paying 6 percent interest and warrants to buy 700 million Bank of America shares at $7.14 apiece, which would make Berkshire the lender's biggest shareholder. At the current share price, Buffett's paper profit on those contracts tops $6 billion.