BKW/THI Call Replay & Summary

Today we held an informative call with John Barker, former Senior VP and CCO of Wendy’s, who lived through the merger of WEN/THI.  A replay of the call can be accessed below.

Replay: BKW/THI Merger Thought Leader Call

Summary Bullets


Can you provide some historical context on the prior WEN/THI merger?

  • Tim’s is a unique brand; very tied into its communities
  • There was a lot of excitement about WEN/THI coming together
  • 1992 first time they were put together under the same roof
  • In his 10 years of association with the brand, the phrase “iconic” would often be thrown around when referring to Tim’s
  • Think it is a spot on description
  • No major restaurant brand is tied as closely to its community or country than Tim Hortons
  • Well-run mom and pop shop; about 2-3 restaurants per franchisee back in the mid-1990’s through mid-2000’s
  • Franchisees were in love with the brand; you don’t see that everywhere
  • Very solid business in Canada; the new unit growth was phenomenal from 1
  • Avg. same-store sales over those ten years was 7.5%
  • Wendy’s was very fortunate to pick up the chain at such a good price

 

What did the WEN/THI merger accomplish?

  • The WEN/THI merger worked for shareholders
  • Tremendous value was created by the time of the IPO and spinoff
  • It was a good relationship from a value creation standpoint
  • From a business standpoint, combination units never really took off on a national level
  • One business was very Canadian centric, the other was very U.S. centric
  • The two brands at that time felt that there was competition, because the franchisees see it that way

Will this deal help accelerate growth for THI?

  • This deal can bring access to different types of franchisees for Tim Hortons
  • It could require a different approach to running the brand
  • Whether or not it will be as successful as it is in Canada remains to be seen
  • The model they currently have in Canada works

Did THI stick to the mom and pop franchising model when dealing with WEN?

  • For the most part, yes
  • If THI wants to accelerate growth, they will need to change the culture of the business
  • This is a multi-year process
  • If they had large franchisees like they have in the Burger King business, that could be different

 

What other hurdles does THI face in building the brand abroad?

  • Good brand awareness just South of the Canadian border
  • But anywhere else, the brand doesn’t have much recognition
  • Customers elsewhere don’t understand Tim’s as a brand, they only understand the functional needs of it
  • Buffalo, Columbus, Michigan – as they immersed themselves more the in the local communities and the brand became better understood, it became more successful
  • It would be difficult to accelerate growth under another franchise model
  • THI uses a grassroots approach to building its business

Is there potential to grow the THI business outside of the U.S./CAN?

  • They didn’t need THI to grow internationally when it was with WEN because it was growing so strong in Canada
  • The functional delivery of the brand is just fine
  • The delivery of products would probably have to be adjusted to some degree, because many of the products in Canada are very unique and they resonate with customers there
  • How you do this internationally, no one really knows
  • Tim’s was an R&D juggernaut back in the day

 

What is the risk of 3G cutting back on franchisee support for THI?

  • This is something they must be very careful about
  • WEN never tried to change THI’s operations
  • THI has a very deep commitment to training, R&D and product delivery
  • National marketing in Canada was brilliant, development and real estate expertise in Canada was best-in-class
  • If you’re going to grow rapidly, you need to replicate these things

THI is already a fairly lean organization – will 3G find cost cutting opportunities there?

  • Comes down to how much synergy they’ll try to create across the two brands
  • WEN was careful to keep the brands separate
  • They shared services at the very highest level only
  • Two different approaches to the businesses
  • Cost cutting buckets might exist, but they’re likely small

Do you believe the motivation behind the deal isn’t tax-based?

  • There is certainly an opportunity to benefit from that
  • This has created significant value already based on the stocks’ reactions

How will this be perceived in the franchise community?

  • THI has been through this once already
  • Didn’t have that much interaction with the WEN brand
  • They didn’t really have a strong opinion about being owned by a U.S. company
  • But since 2005 to today, franchisees are a little more sophisticated and they are probably paying attention to this pretty carefully
  • They will not want their brand to change, particularly the way it’s operated

Has BKW created a firestorm of backlash against the brand?

  • Social media is often blown out of proportion
  • There could be an impact for a little while, but these are things that consumers typically get over
  • Could be a one to two day phenomenon
  • A lot of pride in the THI brand, so it’s a little different with that brand
  • This should be watched very carefully
  • On the political side, this is a very difficult position for politicians to be in as well as people who manage companies because you have a division of responsibilities
  • But you are, by your charter, supposed to pursue shareholder value creation

 

What if BKW sees an extended period of declining sales due to this?

  • Daily sales should be monitored closely
  • BKW could pull back on the deal, but sincerely doubt that will occur
  • You can do a lot to monitor social media
  • Most big brands have these capabilities

 

How difficult is it to bring two companies with distinctly different cultures together?

  • It’s a big issue because restaurant companies have distinct cultures
  • Culture at THI is deeply ingrained; they certainly won’t want to change
  • WEN decided early on to let the THI culture carry on
  • The only place it blended was at the senior level

 

Will the THI Chairman stick around much longer?

  • Don’t have any insight into that
  • It would be wise for BKW to hold on to some of the high-end talent from THI, no matter how they structure the organization
  • Smart companies always figure out a way to do that
  • THI has been a juggernaut over a long period of time
  • If we start to see leakage of people at the company, it would be concerning
  • Franchisees will be watching this pretty closely

Howard Penney

Managing Director

Fred Masotta

Analyst