Burger King purchase of Tim Hortons to go ahead despite new inversion rules

Despite the US government establishing more regulation on corporate inversions, Burger King’s US$11-billion takeover of the Canadian company Tim Hortons will still go ahead, according to a statement made by the Canadian multinational casual restaurant known for its coffee and doughnuts.

The U.S. Treasury Department announced regulations on Monday that will lower the financial benefits associated with inversion deals, which involve American companies buying out foreign firms so that they can relocate to overseas and avoid the tax burden of the U.S., with the lower corporate tax rates in the foreign country.

However, an executive of Tim Hortons says that the agreement between the two companies will not be affected by the recent announcement by the Treasury.

Tim Hortons’ senior vice-president of corporate, public and government affairs, Scott Bonikowsky, said in an emailed statement on Tuesday:

“As we’ve said previously, this deal has always been driven by long-term growth and not by tax benefits.”

However, it is important to note that the Canadian corporate tax rate is lower than in the US.

Over the past ten years around 50 companies have carried out “inversion deals” and there are numerous others considering it.

The new rules by the U.S. state that for an inversion deal to be carried out the U.S. company has to own less than 80 percent of the new merged company, in addition to stopping companies turning earnings oversees into U.S. loans (commonly referred to as “hopscotch loans”).

The new changes haven’t gone into affect, yet neither has the transaction between Burger King and Tim Hortons, which raises concerns about the impact the new rules will have when the transaction is completed.

The transaction will involve 3G capital (the majority owner of Burger King) holding 51 percent of the new entity. Shareholders of Burger King and Tim Hortons will retain 27 percent and 22 percent of the new company, respectively – passing the new ownership requirements established by the American government.

Carla Taylor, an analyst at Fitch Ratings, said:

“Cash flow from Tim Hortons operations should be able to sufficiently service the $9 billion of dollar-denominated debt being issued to partially fund the transaction, potentially circumventing new rules on hopscotch loans between Burger King and its new Canadian parent.”

She added:

“We believe new rules won’t likely deter the Burger King/Tim Hortons transaction.”


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