Fitch: Inversion rules won’t deter Burger King/Tim Horton's merger

Chicago -- The strategic merits of Burger King Worldwide's leveraged buy-out of Tim Hortons Inc. will be tested by Monday's enactment of tightened U.S. Treasury tax rules on U.S. companies seeking to re-domicile their headquarters in countries with more favorable tax systems, according to Fitch Ratings. The new regulation is meant to reduce the attractiveness of inversions and is effective immediately.



Fitch believes the new rules won't likely deter the Burger King/Tim Hortons transaction. The deal is valued at approximately $12 billion (including net debt), which would rank it as the largest restaurant leveraged buy-out in U.S. history.



Upon preliminary review, some of the changes announced under the new regulation for inversions involve taxing certain intercompany loans (also known as "hopscotch loans"), subjecting foreign undistributed earnings to taxation irrespective of the new corporate structure, and strengthening the less-than-80% ownership requirement to avoid the new parent from being treated as a U.S. corporation. Fitch believes the structure of the deal will help the firm avoid some of these challenges.



Burger King's majority owner, 3G Capital, is expected to own 51% of the new Canadian-based company, while Burger King and Tim Hortons shareholders will own 27% and 22%, respectively, allowing the firm to meet the less-than-80% ownership requirement. Moreover, 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, according to Fitch.



Burger King has downplayed the tax benefits of its plan to acquire Tim Hortons with the parent of the new combined company legally organized in Canada, stating that the firm's mid-to-high 20% effective tax rate is largely consistent with Canadian tax rates. Management has indicated that the transaction is more about growth with two complementary fully franchised businesses merging to create the third-largest quick-service restaurant company in the world. But Fitch noted that future potential tax benefits provided by the proposed structure should not be overlooked, even if the firm's effective tax rate remains unchanged.