TORONTO -- The US$11-billion takeover of Tim Hortons (TSX:THI) by fast-food chain Burger King will go ahead despite rule changes by the U.S. government to curb mergers that lower tax payments in that country, a senior executive of the Canadian company said Tuesday.
The U.S. Treasury Department unveiled regulations on Monday that focused on lowering the financial benefits of international "inversion deals," which often involve American companies buying a corporation in another country with a lower tax rate, and then shifting its headquarters to that location.
But one of the coffee and doughnut chain's executives says its agreement won't be affected by the change.
"We are moving forward as planned," Scott Bonikowsky, Tim Hortons' senior vice-president of corporate, public and government affairs, said in an emailed statement Tuesday.
"As we've said previously, this deal has always been driven by long-term growth and not by tax benefits."
Canada has a lower corporate tax rate than the United States.
Among the rule changes are requirements that shareholders of the U.S. company own less than 80 per cent of the new merged entity, and a new shift that tries to stop companies from turning their international earnings into U.S. loans, known as "hopscotch" loans.
About 50 U.S. companies have carried out inversions over the past decade, according to the non-partisan Congressional Research Service. Many more had been considering it.
While the rule changes aren't retroactive, the Tim Hortons and Burger King transaction hasn't closed, which has raised uncertainties about what impact it may have on the combined operation.
Under the proposal, Burger King's majority owner, 3G Capital, will hold 51 per cent of the new company. Burger King and Tim Hortons shareholders will keep 27 per cent and 22 per cent of the combined entity respectively, which will pass the new ownership requirements from the U.S. government.
"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," said Carla Taylor, an analyst at Fitch Ratings.
"We believe new rules won't likely deter the Burger King/Tim Hortons transaction."
Tim Hortons shares closed nine cents lower at $88.04 on the Toronto Stock Exchange while Burger King (NYSE:BKW) shares were off 2.7 per cent at US$30.23 on the New York Stock Exchange.
-- With files from The Associated Press
