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Ackman’s Pershing Square a Quiet Winner in Burger King’s Tim Hortons Deal

NEW YORK (TheStreet) -- "Every private equity firm should be banging down our door."

That was Bill Ackman's pitch in October 2011, when speaking about Pershing Square Capital Management's roughly $500 million investment in a London-listed special purpose acquisition corporation (SPAC) that was in search of its first-ever deal. Less than three years later, Pershing Square is on the verge of winding up with an about 10% stake in the combined Burger King (BKW) and Tim Hortons (THI) , a company that some are characterizing as the next "global powerhouse in the quick service restaurant sector" and a possible competitor to McDonalds (MCD) and Starbucks (SBUX) .

Ackman himself appears poised to own roughly 1% of the combined company. The hedge funder's apparent coup in Burger King's takeover of Tim Hortons underscores his willingness to use creative financial structures to make bold investments, and it may also shed light on the winners and losers in the proposed merger of America's second-leading burger chain with Canada's most iconic restaurant brand.

Burger King shareholders may be the biggest winners in Tuesday's deal, while others such as Berkshire Hathaway's (BRK.A) Warren Buffett also appear poised for a nice payout. Nonetheless, Tim Hortons shareholders may come up on the short over the long-term, even though they would sell their shares to Burger King at a near 40% premium.

3G Capital, a press-shy Brazilian private equity firm founded by the country's richest person, Jorge Paulo Lemann, currently owns Burger King after buying the fast-food chain from a private equity consortium for about $3.4 billion in 2010. Although 3G only put up about $1.2 billion of its own money to buy Burger King, the company's over 70% stake is now worth nearly $7.5 billion.

Tuesday's proposed acquisition of Tim Hortons may increase the value of 3G's holding. Burger King is offering to buy the company for 89.32 Canadian dollars ($81.47) a share, in a cash and stock deal that will give 3G Capital a 51% ownership stake in the combined company.

3G Capital is keeping a controlling interest in the combined company because it will pay 73% of Tim Hortons takeover price in cash thanks to $9.5 billion the firm plans to raise from bond markets and a $3 billion preferred investment from Berkshire Hathaway. Buffett's preferred investment comes at a 9% coupon and will give 3G the ability to execute on a long-term growth plan for Tim Hortons.

Alexandre Behring, 3G's head, said the firm believes Tuesday's deal "will bring together two iconic brands under one platform to create a global powerhouse in the quick service restaurant sector."

Analysts reviewing the proposed merger expect that Burger King's private equity owners may look to dramatically expand Tim Hortons outside of Canada, possibly creating an international coffee and quick service foods powerhouse that can compete with companies as large as McDonalds and Starbucks. 

Clearly, 3G is a winner in the deal. But others such as Pershing Square's Bill Ackman and other minority Burger King shareholders may be getting almost as much value, if not more.

Minority holders owned about 29% of Burger King prior to its planned merger with Tim Hortons and they are forecast to own 27% of the combined company when Tuesday's deal closes. The cash and stock offer for Tim Hortons doesn't appear to meaningfully dilute legacy Burger King shareholders. 

For Pershing and Ackman, the deal may be especially compelling.

Pershing was a large shareholder in a London-listed SPAC that bought a large piece of Burger King from 3G Capital in 2012. The SPAC, Justice Holdings, acquired 29% of Burger King from 3G for $1.4 billion, giving Pershing an about 11% stake in the burger chain and Ackman an about 1% personal holding.

That SPAC deal pre-empted Burger King's listing on the New York Stock Exchange. As shares in the company rose steadily since a June 2012 listing, Pershing and Ackman didn't cash out. It wouldn't be surprising if those investors continued to hold onto their shares. 3G Capital has grown into an international powerhouse from small stakes and the firm now counts investors as savvy as Warren Buffett as long-term partners.

Over the span of two decades, 3G build an interest in Brazilian beer company Brahma into a holding of an international conglomerate called InBev, which then acquired Anheuser Busch in 2007. Jorge Paulo Lemann, 3G's founder, now has a personal stake in AB InBev, the world's largest beer company, worth in excess of $19 billion.

In 2013, Lemann and 3G partnered with Berkshire and Buffett on the $23 billion takeover off ketchup maker Heinz, a deal where Berkshire made an $8 billion preferred investment and an over $4 billion common stock investment that gave it a 50% holding of the company. Now, Buffett is again partnering with 3G Capital.

With so much smart money behind Burger King's takeover of Tim Hortons, one wonders if it is shareholders in the Canadian coffee chain that are getting short changed.

Tim Hortons shareholders are receiving mostly cash for their shares at a 39% premium, but getting very little stock in the proposed transaction. In total, Tim Hortons shareholders are expected to have a 22% stake in the combined company. That gives them only minimal exposure to 3G's growth plan.

Sachin Shah, a merger arbitrage strategist at Albert Fried & Co. said in a Wednesday telephone interview he believes Tim Hortons should have asked for more stock in the combined company.

-- Written by Antoine Gara in New York

Follow @AntoineGara

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