Berkshire Hathaway Inc.'s $3 billion of financing for Burger King Worldwide Inc.'s planned takeover of Tim Hortons Inc. gives billionaire Warren Buffett the option to buy a 1.75 percent stake in the combined company.
Buffett's company received the warrant to buy common shares and agreed to purchase 30,000 preferred shares as part of the deal, Miami-based Burger King said today in a regulatory filing. The perpetual preferred securities pay a 9 percent coupon. Burger King didn't specify how many common shares Berkshire has the right to purchase.
Buffett, Berkshire's chairman and chief executive officer, has positioned his company as a source of financing for deals and patient capital during times of crisis. During 2008, he helped Mars Inc. and Dow Chemical Co. with takeovers and injected a total of $8 billion into General Electric Co. and Goldman Sachs Group Inc.
"Berkshire's participation on this deal demonstrates its ability to use its strong balance sheet and massive cash generation to capture very attractive returns, even without the backdrop of a financial crisis," Meyer Shields, an analyst at Keefe, Bruyette & Woods, wrote of the Burger King-Tim Horton's transaction in an Aug. 26 research note.
The latest investment helps Buffett, 83, deploy some of Omaha, Nebraska-based Berkshire's 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 Burger King. Buffett teamed up with Lemann's firm last year to take HJ Heinz Co. private.
Burger King said Aug. 26 that it would acquire the Oakville, Ontario-based Tim Hortons 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.
Burger King agreed to pay a termination fee of C$500 million if the deal isn't completed as a result of certain circumstances such as regulatory approval, today's filing shows.
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 GE. Both companies redeemed the investments at a premium. Berkshire later swapped warrants it got in those deals for common stock in the companies.
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 Corp. 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, Berkshire received preferred stock paying 6 percent interest and warrants to buy 700 million Bank of America shares at $7.14 apiece. Buffett's paper profit on those contracts exceeds $6 billion.