Aug 272014

As part of the $12.5 billion financing to fund the cash portion of the acquisition of Tim Hortons, Warren Buffett through Berkshire Hathaway will be investing $3 billion in a special issue of preferred stock with a coupon of 9 percent.  The annual dividend of $270 million will be taxed at 35 percent since it will be paid by a foreign company after Burger King moves its corporate headquarters from the U.S. to Canada. If Berkshire had received this dividend from a U.S company, it would be taxed at only 15 percent.

This so-called ‘tax inversion’ (switching domiciles from the U.S. to Canada) will result in a Canadian corporate tax rate of 26.5 percent, which is considerably lower than the 35 percent in the U.S.  However, Burger King currently pays an estimated tax rate of only 27 percent.  Burger King CEO Daniel Schwartz said: ‘We don’t expect our tax rate to change materially…This transaction is not really about taxes…  It’s about growth.”

Burger King said Canada is where it will have 80 percent of its outlets after this deal is completed.  Overall, it expects about two-thirds of its revenue to come from Canada, one-fifth from the U.S., and the rest from overseas locations.

3G Capital of Brazil owns 70 percent of Burger King and will have operational control over the merged firm. Warren Buffett and 3G Capital jointly purchased H.J. Heinz in 2013.  Buffett has praised 3G Capital for their outstanding ability to cut costs and seek growth opportunities through acquisitions. He had previously mentioned that he looked forward to joining with 3G Capital in future deals.

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