Doughnut-Burgers Shake Up the Landscape

 | Aug 25, 2014 | 9:28 AM EDT
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Burger King (BKW) is reportedly in talks to not only buy Tim Horton's (THI), but possibly move its headquarters to Canada, making it the latest poster child for inversion deals.

Shares jumped more than 13% before the bell.

Maybe the company will move its headquarters, maybe not. That's an outcome that will be decided over time, even though the news of what Burger King is considering will start a political conversation.

I'm far more concerned with the potential fallout from the combined Burger King and Tim Horton businesses. Greater purchasing power, economies of scale and geographic reach are some of the MBA-style buzzwords you are likely to hear about all of this. To me, the greater concern is the change in the competitive landscape and how it may be shaken up. 

Already there are headlines about how the combination may impact Starbucks (SBUX). Now, my two cents on this is that, yes, it may have some effect on Starbucks, but there are other companies that should be far more worried. Even though coffee prices have dipped over the last few months, according to data from the International Coffee Organization, current prices remain well ahead of year-ago levels. If the dip continues, I'd look to revisit SBUX shares, particularly if the fallout from this potential business combination is overdone.

The companies that are likely to see more immediate and negative effects from this get-together of American burgers and Canadian coffee is Dunkin' Brands (DNKN), Wendy's (WEN) and even McDonald's (MCD). Given the state of the consumer, recent restaurant traffic reports and rising costs, this competitive disruption is another shake up that could challenge these companies. It's been no secret that McDonald's has seen more competitors come after its breakfast business -- Starbucks for sure, but even Wendy's and Yum! Brands' (YUM) Taco Bell -- and the Burger King-Tim Horton breakfast combo would only add to that pressure. I've not been a fan of or investor in the restaurant space for some time and this certainly does not change my view.

With fast food restaurant businesses taking it on the chin, could we see more M&A deals in the coming weeks? Sure we could. Potential candidates include Wendy's and Jack in the Box (JACK). One I would exclude just because of its different business model is Sonic (SONC), which is heavy on the drive-in experience. Even several private chains, like Cinnabon, could be snapped up as fast food companies look to copy the Burger King move.

Could we see something as big as a McDonalds-Dunkin' get-together? As interesting as that may sound, McDonald's is dealing with too many issues to effectively digest such an acquisition. Even though that may be the case, I would not rule out the rumor mongers from talking it up. If McDonald's did announce such a deal in its current condition, odds are it is even more desperate than we already thought.

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