Tim Hortons could face widespread layoffs and strict cost cutting measures if Burger King's parent company takes over the chain, says a study from the Canadian Centre for Policy Alternatives.
The think-tank released a scathing review of 3G Capital's past takeovers on Thursday and concluded that the Brazilian private equity firm's track record is predictive of "overwhelmingly negative consequences for Canadians" and the Tim Hortons restaurant chain.
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"Without additional strong assurances from 3G Capital that no jobs will be lost ... this may not be in the net benefit of Canada," said CCPA senior economist David Macdonald, who was involved in the preparation of the report.
The policy centre said 3G Capital hasn't made a suitable case for how the merged company benefits Canadians and it's urging the federal government to demand "a better deal" before it approves the transaction.
Report: Private equity firm could force Tim Hortons layoffs
The report suggests 3G Capital's debt financing of the $14 billion takeover cost will force Tim Hortons to lay off more than 700 employees — or 44 per cent of staff working outside its restaurants.
Macdonald pointed to layoffs during past takeovers by 3G, including 740 jobs lost at Heinz and 140 at Labatt.
"It’s likely something Tim Hortons employees will see particularly at the corporate level," he added.
While Burger King's parent company promised to keep the headquarters of Tim Hortons in Oakville, Ont., there have been "grossly inadequate" workforce commitments that have left no guarantees when it comes to overall employment levels or potential mass layoffs, the report said.
Earlier this week, Canada's Competition Bureau approved the takeover plan to buy Tim Hortons, saying it's unlikely to reduce competition due, in part, due to the large number of fast food competitors.
Possible lost tax revenue
The report also suggests the investment firm could shuffle around finances in order to pay fewer taxes in Canada, which could cost the Canadian government between $355 million and $667 million in lost tax revenue over the deal's first five years.
"This is the largest leveraged buyout in Canada-U.S. history for a restaurant chain. 3G Capital is taking out a loan in essence for 14 billion in equity and it’s expensive to pay the interest on that loan," Macdonald said.
"And the interest is tax-deductible, so what that will mean is it will substantially reduce the profits of Tim Hortons and Burger King and therefore substantially reduce the amount of [tax] money that they pay."
While Tim Hortons and Burger King have promised the merger will allow the fast food companies to grow in the U.S. and internationally, the study raises concerns about how 3G Capital could respond if everything doesn't go according to plan.
"The real challenge here is they’ve taken on $14 billion in debt and if this U.S. expansion doesn’t go as planned and that wouldn’t be unusual given past history, now you have to increase profits in other ways," Macdonald told CBC.
Some of the possible options to reduce expenses would be to spin off Tim Hortons' distribution and manufacturing centres to a third partly, which could change the quality of its coffee beans or at least give it less control over the process.
There is little government can do about a reduction in quality, Macdonald said, pointing to the move to centralize donut production when Wendy's took over, a big difference in quality noted by many Canadians.
But he urged Industry Canada to demand guarantees on jobs and tax revenues before it clears the deal.
Since the Tim Hortons merger was announced in August, some analysts and franchisees have raised concerns over 3G Capital's reputation for stripping the assets of acquired companies to boost profits.
Desjardins analyst Keith Howlett published a note at the time questioning the "unusual ending to a two-year CEO search and strategic plan" with a takeover from a burger chain.