To hear stock market analysts and industry gurus gush over the proposed US$12.5-billion merger between Tim Hortons and Burger King this week, one might wonder if they were hopped up on double-doubles and honey crullers. What started with a shocking late Sunday news report that the two food chains were in talks quickly rose to a swelling of adulation for the corporate union and what it might mean to Tim Hortons’ future. The deal offers “huge upside” for the coffee chain’s U.S. expansion, noted one management prof. Consultants were soon envisioning Tim’s kiosks in Burger King’s thousands of restaurants across the U.S. But why stop there? “Could you have a Tim Hortons and a Burger King across the street from each other in South Africa?” a person close to the merger talks mused to Forbes. “Absolutely.”

World domination, Timmy’s style.

Investors hardly needed convincing. Even before seeing the details of the merger, which the companies say will “create a new global powerhouse” in the fast-food sector with a combined US$23 billion in sales, Tim Hortons share price exploded. The revelation that Warren Buffett—the Oracle of Omaha and a man regarded as the most astute investor in America—is chipping in to ﬁnance the deal has only made it more enticing to the market. As Maclean’s went to press Tuesday, Tim Hortons’ market capitalization—the total value of its outstanding shares—stood at close to $11 billion, a 40 per cent jump over what it was just a week ago.

It certainly has all the elements of a tasty narrative, made all the more remarkable by the geopolitical peculiarities of the proposed deal. When Tim Hortons last fell prey to a giant U.S. corporation—that being Wendy’s, which absorbed and operated the iconic chain from 1995 to 2006—Canadians watched in horror as lawyers shufﬂed paperwork to relocate Tim Hortons to the tax haven of Delaware. (It was repatriated to Canada in 2009.) Yet this time around Burger King, backed by its largest shareholder, a Brazilian private equity ﬁrm called 3G Capital, plans to locate the holding company that will control the two chains squarely on Canadian soil. Critics in America claim this is an effort to lower its tax bill to Uncle Sam, but Burger King executives vehemently deny that change and insist the deal is purely about unlocking growth at the two companies.

So Burger King wins. Tim Hortons wins. Canada wins. What’s not to like?

Plenty, once you move past the hype. Because once you do, it becomes clear just how bad this merger could turn out to be for Canada’s beloved coffee chain. For starters, it’s not immediately obvious what either side stands to gain. According to Tim Hortons, the purpose of the deal is to “leverage Burger King’s worldwide footprint and experience in global development to accelerate Tim Hortons’ growth in international markets.” That’s code for breaking into the U.S. market in a big way, a strategy that Tim Hortons has battered itself silly pursuing for nearly two decades, with minimal success. And yet Burger King, the third-largest burger chain in the U.S., behind McDonald’s and Wendy’s, has had a woefully checkered history when it comes to growing its own business at home. Likewise, if Burger King hopes to capitalize on Tim Hortons’ phenomenal success in Canada, the fact is the coffee chain is showing worrying signs that it has maxed out its growth here. At this point Burger King doesn’t even plan to sell Tim Hortons coffee at its restaurants, raising yet more questions about the beneﬁts of the merger.

Instead, some investors, like Patrick Horan, a money manager at Agilith Capital in Toronto, see the marriage of Tim Hortons and Burger King as a classic case of ﬁnancial engineering, and worry about the outcome for the donut chain. With interest rates low, the companies are piling on billions in debt to pay for the transaction. Buffett’s contribution to the deal is US$3 billion in preferred stock, a type of debt instrument, while two Wall Street banks have arranged another US$9.5 billion in debt ﬁnancing. True, Tim Hortons’ balance sheet as it stands is relatively clean. But Standard & Poor’s, the debt rating agency, warned this week it was putting Burger King on watch for a credit downgrade, saying the proposed deal “will increase consolidated debt substantially” for the new combined company “and weaken credit protection measures compared with either company currently.” At the very least, some of Tim Hortons’ cash ﬂows will be going to pay down the US$3 billion in debt Burger King already owes, never mind all this new debt, and that has the potential to rob it of cash that could be used to bolster its own business. If interest rates rise, so too may debt payments.

In short, the debt taken on by the new company will loom over every operating decision Tim’s makes, thrusting the coffee chain into uncharted territory where it must answer to a cutthroat private investment ﬁrm in faraway Brazil that never saw a cost it couldn’t synergize. “These 3G guys are really about how can we extract more out of the business, and long term, that tends to not work out well for a brand,” says Horan, who is considering “shorting,” or betting against, the shares of the holding company if and when the deal closes and it hits the market. “They have to extract so much money out of the business to pay down that debt, that they can’t do the smart things and the long-term things needed to keep their positioning in the marketplace. I suspect that could be the case for Tim Hortons in Canada in the long term.”

For everything investors might say about the importance of focusing on the long term, however, the Tim Hortons board of directors has a ﬁduciary duty to shareholders, and when the company was approached with an offer from Burger King, it was obliged to consider it. It’s not entirely clear yet if the ﬁrst entreaty came directly from the burger chain or through its investors, either 3G or hedge fund manager Bill Ackman, Burger King’s second-largest shareholder. But it’s certain that if Tim Hortons had not entertained Burger King’s offer, Ackman, an activist investor famous for his pitched battles with companies—whose stake in Burger King has already earned him an additional US$200 million on the takeover news—would have sparked an ugly shareholder battle over Tim’s.

And that is the dangerous and bizarre tightrope Tim Hortons executives now ﬁnd themselves walking—balancing their ﬁdelity to the storied Tim Hortons brand, upon which the company’s loyal customer base rests, with the hard-nosed realities of a proﬁt-driven public company. On the one hand, the company is desperate to reassure Canadians that under the deal, which comes just months after Tim Hortons celebrated its 50th anniversary, the two chains will be run separately to preserve their “heritage.” In a conference call with media, Tim Hortons CEO Marc Caira vowed to make sure the Timbit remains “as much a symbol of Canada as the beaver or the Mountie.”

And yet it’s become readily apparent to more and more Canadians just how far this modern iteration of Tim Hortons—a company engineered and zapped to life by Wall Street hedge funds and investment bankers eight years ago—has strayed from the warm and fuzzy Tim Hortons of our imaginations. As Tim’s gambles on its very future with this merger, one wrong move and all the goodwill the company has accumulated over the last half-century could be wiped away like dribbled coffee.

the deal is not done yet. Tim Hortons shareholders must vote on whether to approve the cash-and-share offer, which values Tim Hortons at $94 a share, up from $68 last Friday. The deal must also receive approval from regulators in both Canada and the U.S. But if all goes to plan, the combined company will have roughly 18,000 restaurants across more than 100 countries, creating the third-largest fast-food operator in the world. Despite Buffett’s sizable investment, he will not play a role in managing the new company, while 3G, the Brazilian investment ﬁrm which owns 70 per cent of Burger King, will control 51 per cent of the new company.

For 3G, this is just the latest in a series of shrewd deals. Led by billionaire Jorge Paulo Lemann, a former Brazilian tennis champion, 3G also worked with Buffett to put together a US$23-billion deal to buy ketchup maker Heinz last year. Canadians will remember that deal as having led to the sale of a 105-year-old plant in Leamington, Ont., throwing hundreds out of work. And Lemann was at the centre of international brewer InBev’s $52-billion takeover of Anheuser-Busch, maker of Budweiser beer, back in 2008.

But in Burger King, 3G faces a steep challenge—one that Tim Hortons will inevitably be drawn into if the deal is consummated. When it inked a $4-billion leveraged buyout deal back in 2010, it became the latest in a long line of suitors that had promised to “ﬁx” the 60-year old chain, which was ﬂagging in the face of stiff competition from a reinvigorated McDonald’s and a new crop of rivals like Chipotle Mexican Grill and Panera Bread. Just eight years earlier, Texas Paciﬁc Group, Bain Capital and Goldman Sachs were heralded as Burger King’s saviours after paying $2.26 billion to buy the Whopper-maker from London-based spirits- and beer-producer Diageo. But while the three succeeded in taking Burger King public in a 2006 IPO (only to be delisted and privatized four years later) they failed to remedy its long-term competitiveness.

Not surprisingly, all that ﬁnancial tinkering has threatened to take the focus off Burger King’s core business of selling burgers, fries and drinks. Until recently, many of the stores were seriously dated, full of brightly coloured plastic furniture (it was estimated that 3G’s actual purchase price was really closer to $7 billion, given all the renovations that were required) and menu was all over the place. Whereas Subway has been focused on “fresh” and McDonald’s on becoming hip and healthy, Burger King seemingly had no issue with introducing heart-clogging menu items like the “Bacon Sundae” one day and supposedly better-for-you Satisfries (20 per cent fewer calories, 25 per cent less fat) the next. Satisfries have since been dumped by two-thirds of the chain’s 13,667 restaurants following poor sales.

Worse, the lack of direction frequently led to pitched battles between Burger King’s Miami head ofﬁce and individual franchisees—an uncomfortable parallel with Tim Hortons’ own ﬁghts with its franchisees—including a class action lawsuit brought by franchisees over a $1 double cheeseburger. Burger King was keen to use the cheap sandwich to juice sales, but operators complained it was killing their bottom lines. The suit was ultimately dropped in exchange for giving restaurant owners more control over the menu.

Equally damaging has been Burger King’s scattered approach to marketing. The chain once promised diners juicy “ﬂame-broiled” burgers and the opportunity to “Have it your way,” but by the mid-aughts was running a bizarre ad campaign that featured a giant, plastic-faced “King” who had an apparent penchant for sneaking into people’s bedrooms and watching them sleep. Both the ads and the mascot were dubbed “creepy” by critics. Burger King pulled them in 2011.

Given all the baggage, then, it’s little wonder 3G is intent on making a clean break with the past. To get there, Lemann recruited a team of young, fresh-faced executives, led by 33-year-old Daniel Schwartz, to oversea a turnaround effort that’s so far focused on relentless cost-cutting and a dramatic reorganization of Burger King’s business. According to Bloomberg Businessweek, Burger King wasted no time in slashing extravagances like the corporate jet and a lavish annual party in Europe, and has even gone so far as to require ofﬁce employees use Skype for long-distance phone calls.

On the business side, Burger King has also ditched the industry tradition of owning a sizable percentage of its own stores as a way to ensure quality and consistency by keeping management in touch with the frontlines of the business. While both McDonald’s and Wendy’s own about a ﬁfth of their locations, Burger King has sold off over a thousand of its stores since 2010 and now retains just 52—mostly to train staff and test new products. In effect, 3G managed to ofﬂoad considerable costs, like store renovations, to franchisees, while simultaneously slashing Burger King’s corporate head count. It’s the sort of ﬁnancial sleight of hand that Wall Street loves because the effect on the bottom line is immediate. While Burger King’s corporate revenue fell to $1.1 billion last year from $2.3 billion in 2011 due to the declining number of company restaurants (these ﬁgures don’t include franchise sales) proﬁts have soared over the same period—to $234 million from $88 million. As Bloomberg put it, Burger King has become a cash machine, “and 3G hasn’t been shy about helping itself to some of that money.”

While investors have been thrilled, pushing the stock price up nearly 40 per cent over the 12 months before the deal was announced, critics argued that 3G’s efforts to transform the day-to-day aspects of business—overhauling Burger King’s tarnished reputation and developing innovative new menu items—remain a work in progress. And that’s where Tim Hortons comes into the picture.

With its healthy proﬁts, well-loved brand (in Canada, at least) and strategic positioning in the booming coffee market, Tim’s seemingly offers 3G a rare opportunity to help fund its Burger King turnaround while setting it up for future growth. At the moment, the North American fast-food sector is in the midst of an all-out breakfast war, with Taco Bell pushing its Wafﬂe Taco and McDonald’s taking on Starbucks with espresso-style McCafé drinks. Coffee is key to winning the battles, since it’s the one thing that people tend to buy from the same place every single day. “Coffee is the thing that turned our business here,” McDonald’s Canada CEO recently told Maclean’s.

Burger King already has a partnership with Starbucks to sell its Seattle’s Best brand, but experts say 3G’s move to buy Tim Hortons could give it an even bigger share of a thriving market for joe. “You’re talking about a brand with its own coffee business that could be leveraged aggressively across all the Burger King stores,” says Darren Tristano, the executive vice-president of Chicago-based food consulting ﬁrm Technomic. While executives were careful to stress that there are currently no plans to sell Tim Hortons brew in Burger King stores, Tristano says there’s still an opportunity for Burger King’s owners to beneﬁt from being involved directly in the coffee business, where it can now make bigger margins off the purchase, roasting and sale of the coffee itself. That not only includes cups of coffee sold in restaurants, but also the growing market for branded coffee beans sold in supermarkets and in single-serve pods. “I do see some strong opportunities for synergy,” Tristano says. “Unfortunately, history has shown that the negatives tend to balance out the positives in these types of deals.”

The first very Tim Hortons, a converted gas station in Hamilton’s industrial north end, opened for business on May 17, 1964, a few weeks after the man named on the yellow sign won his third Stanley Cup with the Toronto Maple Leafs. Fifty years and 4,500 stores later, the company narrative is now engrained in the Canadian consciousness: the Hall of Fame hockey star and his police-ofﬁcer partner who created not only a coast-to-coast coffee behemoth, but a slice of national pride.

At Timmy’s—where a double-double is one drop java, one drop patriotism—the average customer doesn’t see a multi-billion-dollar corporation thirsty for proﬁts. They see a piece of themselves. Every heart-tugging commercial (the new immigrant at the airport, Timbits hockey, the underprivileged kid off to summer camp) only reinforces that sacred connection. Competitors can only dream of such ﬁerce product loyalty: the sense, however contrived, that to sip Tim Hortons is to be Canadian.

But myth and reality are two very different things, and the company has certainly endured its share of bumps on the road to success. Yes, the Tim Hortons story is a classic tale of persistence, hard work and a bit of luck, but at its core—underneath all the folksy Canadiana—is a massive, modern-day corporation most Canadians don’t equate with their image of the brand. A corporation ultimately ruled by shareholders, not patrons. A corporation with a history of bitter executive rivalries and nasty lawsuits. And a corporation where “always fresh” baked goods means “frozen and reheated” (and manufactured by a Swiss company, not a Canadian one).

Even Horton himself, an almost-sainted ﬁgure since his tragic car crash in 1974, was hardly that—drunk behind the wheel of his Ford Pantera as he sped down a dark highway.

The Tim Hortons business model is built on franchisees, independent owners who pay a hefty start-up fee (close to $500,000) plus a percentage of sales to cover rent, royalties and advertising. They are obligated to buy all their supplies from head ofﬁce and adhere to a strict set of standards, but beyond that, proﬁts are theirs. When co-founder Ron Joyce took full command after Horton’s death, a typical franchisee enjoyed 20 per cent proﬁt margins, if not more. Many became millionaires. “If there was ever a sure thing,” Joyce famously wrote in his 2006 autobiography, “owning a Tim Hortons franchise was it.”

Joyce didn’t fare too badly, either (ﬁnancially, at least). In a move that is eerily similar to this week’s Burger King deal, he sold his beloved company in 1995 to Wendy’s in a transaction worth US$600 million (paltry, in hindsight, compared to the $12.5-billion Burger King whopper). But despite being appointed senior chairman of Tim Hortons and given a seat on Wendy’s board, Joyce quickly grew to regret the deal and eventually walked away. To this day, he wishes he never parted with his “baby” in the ﬁrst place.

It was Joyce, in fact, who spilled the beans about his old company’s most controversial decision: replacing in-store deep fryers, a hallmark of the Tim Hortons brand, with frozen crullers and fritters trucked in from a factory in Brantford, Ont. (At the time, Tim Hortons owned 50 per cent of the new Maidstone facility, but has since sold its share to Zurich-based Aryzta AG, which continues to supply the chain with “par-baked” frozen products that are ﬁnished in-shop.) “This is not a philosophy that I would have embraced if I still owned the company,” Joyce revealed to a reporter in 2003. “I’ve tried them,” he added. “And they’re certainly not the same.”

Freezers aside, Tim Hortons was still the undisputed jewel of Wendy’s portfolio, far out-earning the company’s burger-and-fry joints. Smelling opportunity, several prominent hedge funds bought in and started lobbying Wendy’s to spin off its most proﬁtable asset, forcing an eventual IPO in 2006. To nobody’s surprise, sentimental Canucks jumped at the chance to gobble up stocks. Three years later, when Tim Hortons’ parent company ofﬁcially registered the head ofﬁce back in Canada after its long hiatus in Delaware, the Prime Minister himself attended the celebration. “In so many ways,” Stephen Harper said, borrowing the words of historian Pierre Berton, “the story of Tim Hortons is the essential Canadian story.”

Behind the scenes, though, an explosive court case was brewing: a proposed $1.95-billion class action lawsuit, alleging that the company’s historic shift to frozen products had taken a signiﬁcant bite out of store owners’ cash registers. A judge ultimately refused to certify the suit, but not before it exposed some dirty company laundry. “Every owner that I have talked to has expressed dissatisfaction with the bottom line,” read one note sent to Roland Walton, head of Tim’s Canadian operations, weeks after the lawsuit was launched. “I have yet to be in the company of Tim Franchisee’s [sic] whether at meetings or social situations that there isn’t lots of bitching and complaining.”

Morale took another major hit in May 2011, when Tim Hortons announced the abrupt departure of popular CEO Don Schroeder, himself a former franchisee and the company’s in-house coffee expert. Whatever triggered his sudden exit, he was paid $5.7 million to walk away and keep quiet—and two full years would pass before a replacement was named.

Enter Marc Caira. A former senior executive at Nestlé, he has grappled with two dangerous realities threatening Tim Hortons that could derail plans for the new, merged company: Tim Hortons’ growth strategy of blanketing the Canadian landscape with new stores has hit a wall, yet its efforts to expand into the U.S. have been a resounding failure. At home, the company’s annual same-store sales growth in Canada—a measure of the performance of restaurants open for more than a year—have slipped from a high of six per cent in the mid-2000s to little more than one per cent last year. Investors cheered when same-store sales growth rose to 2.6 per cent in the second quarter thanks to the introduction of new products, but it was a small victory compared to the threat posed by a Canadian market saturated with red Tim Hortons signs.

Tim Hortons could only dream of such a problem in its U.S. operations. For 20 years the company has talked up its U.S. plans in one form or another. Over the last decade it has sunk more than $650 million into developing stores in that market. And yet according to Technomic, the chain’s market share remains mired in the low single digits. The latest vow of growth, spelled out in Tim Hortons’ 2013 annual report, is that American stores will generate $50 million in operating income by 2018, a tiny sum considering it has 859 outlets south of the border. This disappointing performance offers a hint of what’s in store for 3G and Burger King if they want to realize some of the grandiose expansion plans bandied about. Given their tightﬁsted reputation, it’s not clear they’ll be forthcoming with the necessary cash to do the job right.

Earlier this year, Caira presented his new growth plan to investors. (Needless to say, there was no hint of a takeover.) He made it clear the company could no longer rely on simply opening more stores, and promised to beef up the innovation of new products such as its dark roast coffee and additional sandwiches and donuts. Then he did what every other CEO has: he unveiled another round of store openings in Canada—500 over the next ﬁve years, bringing the national tally to roughly 4,100.

Beset by rivals at home, and ﬂailing in the U.S., Tim Hortons was clearly running out of options. But Burger King and its ambitious owners may not turn out to be the worldly, savvy saviours many believe they will.

The easy cost savings 3G found at Burger King won’t be nearly so easy to root out at Tim Hortons. Whereas Burger King had hundreds of company-owned stores to sell off, Tim Hortons’ franchisees already own the vast majority (99.6 per cent in Canada) of its restaurants. While executives have hinted at the potential for savings behind the scenes, in areas like marketing and supply chains, the disparate nature of the two businesses and the concentration of stores in each company’s home country suggests there’s relatively few opportunities to eliminate overlap.

All of which raises the question: Where’s the upside to justify the huge, 30 per cent premium being paid to Tim Hortons’ shareholders? On the surface, the answer seems simple—the realization of Tim Hortons’ long-standing international ambitions. But given the company’s track record in cracking the U.S. market, and Burger King’s own struggles at home, it’s far from a slam dunk.

Alan Middleton, a marketing professor at York University’s Schulich School of Business, argues Tim Hortons’ U.S. expansion was hamstrung by a lack of brand awareness south of the border—hence the name change to Tim Hortons Café and Bake Shop—and what appears to be a general reluctance among Canadian companies to truly dive head-ﬁrst into the ultra-competitive U.S. market place. “Doing business in the U.S., particularly in retail and food service, is massively dependent on price dealing and marketing communication—ad spending,” he says. “Canadian companies tend to be a bit risk-averse when it comes to getting involved in that.”

Burger King should be able to provide Tim Hortons with a bigger platform to make its voice heard south of the border. The question is whether its new owners are capable of ﬁguring out the right message to broadcast. “They really need Tim Hortons to be successful outside of Canada for this to make sense, and this Burger King management team, other than their ﬁnancial engineering side, I don’t see them as being very sharp on the marketing side,” Horan says.

Like Canadian Tire, so much of Tim Hortons’ success in Canada can be attributed to its Canadian-ness, it’s easy to forget it’s not all that different from other coffee shops. And unlike McDonald’s, whose American roots are a selling point around the world, there are almost no Canadian companies who have done well internationally by trading on their association with the Maple Leaf—with the sole exception of parka-maker Canada Goose, presumably because Canadians are thought to know something about surviving bone-chilling winter weather. Coffee? Not so much.

The concern is that if the effort fails, it will be Tim Hortons that ends up paying the steepest price. 3G is not known for being a patient investor and, despite helping to pen a “commitment to Canada”—including a vow to maintain Tim Hortons’ charity and community programs and not to change restaurant-level employment numbers—the Brazilians can be expected to train their sharp pencils at the head ofﬁce in Oakville, Ont., at the ﬁrst sign of trouble, if not before. “They’re renowned for ﬁnding short-term ways to screw extra money out of businesses to get better margins,” Middleton says. “If they try to enforce that on Tim’s, it could have a negative effect.”

As an example, Middleton points to the dozen or so new menu items that Tim Hortons adds every year—like lasagna and cheesecake donuts. That willingness to experiment could be curtailed if 3G is looking for easy ways to cut costs. “Over time that reduces the currentness of Tim’s proposition to people,” he says. Worse still, if the Burger King turnaround runs into trouble, or if Tim Hortons’ own expansion plans falter, 3G won’t hesitate to squeeze as much money out of Tim Hortons as it possibly can. This could come at a time when Tim Hortons is battling a host of hungry rivals, from Starbucks to McDonald’s to Subway. After all, this is the same group of investors—3G and Buffett—that didn’t blink when it closed its operations in Leamington, Ont., rendering the town’s “tomato capital of Canada” moniker little more than a cruel joke.

Tim Hortons fans are unlikely to show up at the drive-through to ﬁnd nothing but static on the intercom, of course. But if the deal fails to live up to lofty expectations, the long-term impact on Tim Hortons’ customers will likely manifest itself more like a slow-growing cancer. Fewer new products. Less innovation. A pullback in community involvement. Basically, all the things that made Tim Hortons so successful in the ﬁrst place. “If things get tough, this could be like diluting the coffee,” says Horan. Middleton is more blunt: “The danger is being killed by the death of a thousand cuts.”

Who knows? Maybe in another 10 years after things go terribly wrong, Burger King will spin off its coffee chain and we’ll get our Tim Hortons back. Again.