Should Investors Be Concerned About Restaurant Brands International Inc.?

Restaurant Brands International Inc. (TSX:QSR)(NYSE:QSR) has begun to cut management positions. Is it all just part of the plan or cause for concern?

| More on:
The Motley Fool

When 3G Capital merged Tim Hortons and Burger King under the banner of Restaurant Brands International Inc. (TSX:QSR)(NYSE:QSR) changes were to be expected. 3G Capital has a fairly predictable playbook it follows with companies it acquires, mainly to slash and burn expenses. This is to be expected with any major merger, but especially with a deal like this. Any time you have major companies coming under one roof, redundancies and duplicate positions will be eliminated.

The question for investors is how far 3G Capital will go to cut costs at Tim Hortons. Is this first wave of layoffs all part of the plan or will the quality of the company and the Tim Hortons brand be at stake?

HQ layoffs

One of the conditions that the Government of Canada placed on the merger was that 100% of the 96,000 franchise employees would be protected from job losses. However, the agreement only protected 80% of the 2,000 managers and executives employed by Tim Hortons. Despite several reassurances to the contrary, 350 employees at Tim Hortons HQ and several regional offices have been let go with the aid of an external outplacement agency.

In previous 3G Capital takeovers, the cuts to management and front line staff were quite swift and some felt they compromised the company’s ability to operate. With the Tim Hortons integration, 3G Capital will not have the same freedom. The Canadian government has not only limited 3G Capital’s ability to cut staff but it has also attached provisions that protect charitable programs, freeze franchise royalties and rent for five years, and prohibit co-branded stores like we saw with the previous Tim Hortons/Wendy’s merger.

The plan

Thanks to these government restrictions, 3G Capital will not be able to inflate net income through reducing expenses at the rate we have seen with Burger King or Heinz. This also means that the stock could see a slower price increase than originally anticipated in 2014. There is also the matter of the debt, which equals roughly 50% of the combined revenues of Tim Hortons and Burger King. It was anticipated that the newly formed company would be able to offset its debt repayment thanks in part to the amount of free cash flow currently generated by Tim Hortons.

Then you have the division of shares, as 3G Capital controls 52%, hedge fund Pershing Square holds 19%, and Warren Buffett (through Berkshire Hathaway Inc.) holds $3 billion worth of shares. All of this translates into an immense amount of pressure to perform, turn a profit, and not drown in debt.

What’s left for everyday investors?

Unlike good old Tim Hortons, this company has no dividend, again as a way to manage the behemoth level of debt. Investors should expect a couple of years of steady growth as 3G Capital makes whatever fiscal adjustments it can to inflate net incomes.

Despite all those efforts, the debt will limit the stock’s growth in the near term. Tim Hortons was once a buy and hold until retirement stock, but RBI just might be a short hold. Over the coming years, keep a close eye on trading volumes and watch for the day Buffett and the hedge funds begin their stock purges.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Cameron Conway has no position in any stocks mentioned. The Motley Fool owns shares of Berkshire Hathaway.

More on Investing

Two seniors float in a pool.
Dividend Stocks

TFSA: How to Earn $1,890 in Annual Tax-Free Income

Plunk these investments into your TFSA to earn passive income and avoid the taxman.

Read more »

grow dividends
Investing

Here’s My Top 3 TSX Stocks to Buy Right Now

Even though the TSX has been rising, there are still some good bargains out there. Here are three top compounding…

Read more »

Target. Stand out from the crowd
Investing

Prediction: This Canadian Growth Stock Could Double by 2030

Alimentation Couche-Tard (TSX:ATD) is a top growth stock that could do well over the next six or so years.

Read more »

Businessman holding AI cloud
Tech Stocks

Could Investing $20,000 in Nvidia Make You a Millionaire?

Nvidia stock has made investors millionaires in the last 10 years. Is it too late to invest to become a…

Read more »

Engineers walk through a facility.
Dividend Stocks

1 TSX Stock I Wouldn’t Touch With a 10-Foot Pole

AtkinsRéalis (TSX:ATRL) is one TSX stock I'd never invest in.

Read more »

money cash dividends
Stocks for Beginners

Have $500? 3 Absurdly Cheap Stocks Long-Term Investors Should Buy Right Now

If you're looking for cheap stocks, these three have a huge future ahead of them, all while costing far less…

Read more »

edit Woman in skates works on laptop
Dividend Stocks

3 No-Brainer Stocks to Buy Under $30

These three stocks all offer a huge deal for investors looking for dividends, as well as growth that will last.

Read more »

Business man on stock market financial trade indicator background.
Tech Stocks

1 Growth Stock Down 50 Percent to Buy Right Now

There are plenty of growth stocks in the market worth considering, but Shopify (TSX:SHOP) looks like one of the best…

Read more »