Under the terms of the deal, Tim Hortons investors will receive C$65.50 in cash and 0.8025 of a share in the combined entity that will be domiciled in Canada. That amounts to roughly C$94 a share, based on Burger King’s closing price Aug. 25 before the terms of the deal were announced.
“It’s a done deal, nobody is going to say no to C$94,” David Baskin, president of Baskin Financial Services Inc. in Toronto, said in a phone interview yesterday.
His firm manages C$700 million and holds shares of Oakville, Ontario-based Tim Hortons. “I’m very happy with the amount. It’s much more than we expected, frankly.”
The combined company will be headquartered in a yet-to-be-determined Canadian location, a so-called tax inversion, and could potentially lower the merged company’s tax rate.
Canada’s foreign investment agency will follow regular practice and review the proposed transaction, Finance Minister Joe Oliver said yesterday. All foreign takeovers worth at least C$354 million are examined to ensure they are in the long-term interests of the Canadian economy.
“Canada has become a very attractive place for capital and for growing businesses,” Oliver told reporters in Toronto. “This is an acquisition which will be evaluated by Investment Canada to determine whether it’s a net benefit to the country,” he said, referring to the review panel.
Investors Selling
Other investors have either sold their positions in Tim Hortons or are preparing to do so.“The easy money’s been made on this stock, now you’re taking more risk in betting that there’s a lot more upside here,” said Brian Huen, managing director at Red Sky Capital Management Ltd. in Toronto. His firm manages about C$250 million and sold its shares of Tim Hortons yesterday. “There’s been a lot of return that’s been generated as a result of this deal over a very short period of time.”
The transaction is still subject to regulatory approval and a shareholder vote at Tim Hortons. Since 3G Capital Inc. owns 70 percent of Burger King’s shares and has approved of the transaction that will see it own 51 percent of the combined company, no shareholder vote will be required at that company, the firms said during a conference call yesterday.
Regulatory Risk
“There’s always a risk, that’s why it isn’t trading at C$94, so there’s a little bit of uncertainty,” said Frank Maeba, managing director at Breton Hill Capital in Toronto. The firm manages about $660 million, with Tim Hortons one of its largest positions. “These tax inversions are a loophole the U.S. will look to close in the future.”Tim Hortons rose 8.1 percent to close at C$88.71 in Toronto. The shares have surged 43 percent this year compared with a 15 percent gain in the benchmark Standard & Poor’s/TSX Composite Index. Burger King’s shares fell 4.3 percent to $31 in New York.
White House spokesman Josh Earnest told reporters in Washington yesterday the administration is considering a range of options to make tax inversions less appealing. “It certainly isn’t fair to the millions of middle-class families in this country that don’t have that option,” he said.
Oliver didn’t provide a timeline on how long the review would take. Under the law, Canada has 45 days to review deals once a foreign investor has applied for approval. The government can unilaterally extend the deadline by 30 days, and the investor must agree to any further extensions.
‘Big Pop’
The takeover should be approved without major conditions according to Lawson Hunter, lawyer for Stikeman Elliott LLP in Ottawa and a former head of the Competition Bureau.“It’s pretty hard to see why it would be turned down,” Hunter said. “I mean, the Prime Minister likes Tim Hortons, but I would think this will be treated as a pretty normal transaction.”
The companies said yesterday they expect the takeover to be completed late this year or early next year.
Breton Hill will sell some of its Tim Hortons shares as the stock is starting to look expensive compared with its peers, Maeba said.
“We’ll take some profits now after the big pop,” he said.
If the stock pulls back to about C$85 or less, Red Sky’s Huen would consider buying back into the name as there will be longer-term upside in a Tim Hortons-Burger King tie up.
Other Targets
Meanwhile, there may be a short-term trade for other Canadian stocks that are potential tax inversion candidates, including Gildan Activewear Inc. (GIL), Lululemon Athletica Inc., Alimentation Couche-Tard Inc. and Maple Leaf Foods Inc. (MFI), Huen said. He owns shares of Gildan and Couche-Tard.“You need to make sure you’re buying a good business with strong fundamentals and your only thesis isn’t that this is a tax inversion acquisition candidate because there’s a good chance for disappointment,” Huen said. “But I do think there could be a short-term trade here. Maple Leaf is one that people talk about.”
Baskin has yet to decide whether to sell his stake ahead of the deal closing.
“If all of our companies got taken over at 50 percent more than they were trading two months ago, we’d be happy with that,” he said.
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