Fitch Ratings says the Burger King-Tim Hortons merger is strategically sound, but concerns remain.

CHICAGO – Ratings of Burger King Worldwide Inc. and its subsidiaries are on “rating watch negative” following Burger King's bid to acquire Tim Hortons Inc., Fitch Ratings reported.

The combined company will be based in Canada and will have approximately $23 billion in system sales, with more than 18,000 restaurants in 100 countries. The deal is valued at $12 billion including Tim Horton's debt. Financing for the acquisition includes a $6.75 billion senior secured term loan B facility, $2.25 billion of second-lien notes and $3 billion of preferred equity from Berkshire Hathaway, Fitch noted.

Fitch said Burger King’s significantly higher debt could lead to a downgrade of the company’s Issuer Default Rating. However, the combined businesses’ EBITDA growth, cash flow and the pace of debt repayment within two years of closing the deal could resolve the “negative watch”, Fitch said. Otherwise, the merger is a strategically sound move, the ratings agency said.

“Fitch believes the combined entity will benefit from increased efficiencies of scale, the diversification provided by two leading nearly 100 percent franchised quick-service restaurant brands, and multiple levers for future growth,” the ratings agency said in its analysis. “Burger King's ability to expand Tim Horton’s internationally and to reduce cost will be complemented by Tim Horton’s established position in the faster growing coffee/snack category, progress with loyalty and mobile payment, and high average unit volumes.”

Fitch added that Tim Hortons is an iconic brand in Canada with more than 42 percent market share and strong customer loyalty. Tim Hortons has reported 23 years of same-store sales growth in Canada. Meanwhile, Burger King has registered three consecutive quarters of same-store sales growth, and has successfully executed its “Four-Pillar” growth plan for North America.

However, Fitch cautioned that “These positive factors are partially offset by limited transparency regarding the financial stability of franchisees, the highly competitive US restaurant industry, and execution risk due to uncertain success of Tim Horton's expansion beyond its core Canadian market.”