TIM HORTONS INC. $80 - New York symbol THI

TIM HORTONS INC. $80 (New York symbol THI; Aggressive Growth Portfolio, Consumer sector; Shares outstanding: 132.8 million; Market cap: $10.6 billion; Price-to-sales ratio: 3.7; Dividend yield: 1.5%; TSINetwork Rating: Average; www.timhortons.com) still plans to go ahead with its deal to merge with Miami-based Burger King Worldwide (New York symbol BKW), even though the U.S. government is now clamping down on “tax inversion” deals like this.

The combined firm will be based in Oakville, Ontario, which will let it take advantage of Canada’s 15% corporate tax rate, compared to 35% in U.S.

Under the new rules, it is now more difficult for the foreign parent firm to shift funds between subsidiaries.

As well, shareholders of the former U.S. company must own less than 80% of the combined firm. That should not be a problem, as Brazilian privateequity
firm 3G Capital Management will wind up with 51% of the merged company. Other Burger King investors will hold 27%, while Tim Hortons shareholders will own the other 22%.

The uncertainty over the new U.S. tax rules is partly why Tim Hortons is trading below the current value of the default bid of $65.50 (Canadian) in cash plus 0.8025 of a Burger King share, for a total value of $83.88.

We see Burger King as a hold. If you need to extract funds from your portfolio, you could sell some of your Tim Hortons stock. Otherwise, hold.

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