BKW Stock Ended Down 4% on THI Merger News - and It'll Come Roaring Back

Update: Burger King (NYSE: BKW) stock finished down 4.32% Tuesday after the company's morning announcement that it will merge with Ontario-based coffee-and-donut chain Tim Hortons Inc. (USA) (NYSE: THI). THI stock closed up 8.47%.

In contrast, when news of merger talks originated on Monday, and shares in both BKW and THI enjoyed significant gains and ended that trading session up 19.51% and 18.91% respectively.

There's a reason why BKW stock took a turn and finished in the red Tuesday...

Why BKW Stock Closed Down Tuesday

BKW stock

THI is the largest publicly traded restaurant chain in Canada, while BKW is the second-largest fast food hamburger chain in the world.
Combined, BKW and THI make the third-largest quick service restaurant company in the world, boasting about $23 billion in sales and more than 18,000 restaurants in 100 countries. The new company will be headquartered in Canada, where the largest market exists for it.

The move marks the latest in a series of recent "tax inversion deals" - a merger between a U.S and a foreign company specifically designed to allow the U.S. company to move its headquarters out of the United States to escape America's high corporate tax rate.

You see, the U.S. has the highest corporate tax rate in the industrialized world at 35%. That number has caused about 50 U.S. companies to reincorporate overseas to tax-friendly countries like Ireland over the last 10 years, about half of which are in the Standard & Poor's 500. Recently, even more companies have been making the move. Pfizer Inc. (NYSE: PFE) has been attempting to strike a deal with Britain's AstraZeneca Plc. (NYSE ADR: AZN) all year. On July 18, U.S. drugmaker AbbVie Inc.(NYSE: ABBV) announced plans to merge with Dublin-based pharmaceutical company Shire Plc.(Nasdaq ADR: SHPG) in a $54.7 billion deal. On June 15, Minneapolis-based Medtronic Inc. (NYSE: MDT) bought Ireland-based Covidien Plc. (NYSE: COV).

Comparatively, the Canadian federal corporate tax rate has been cut to 15% under current Prime Minister Stephen Harper. Public companies in the country also must pay provincial corporate taxes that can bring their combined federal and provincial tax rate to approximately 25% - still about 10% lower than the U.S. federal corporate tax rate.

For example, in 2010, formerly California-based Valeant Pharmaceuticals International (NYSE: VRX) merged with Canada's Biovail Corp. and re-domiciled in Canada. The company's tax rate is now less than 5%.

But the deal between BKW and THI will certainly be met with public scrutiny, as the BKW stock drop reflected Tuesday...

You see, tax inversions have drawn much fire recently from activist groups and politicians, including President Barack Obama, who recently criticized them as an "unpatriotic tax loophole."

Just last week, the U.S. Treasury Department announced it's in the process of putting forth regulations to curb tax inversions.

And in early August, we watched a near-deal between Chicago-based Walgreen Co. (NYSE: WAG) and Britain-based Alliance Boots die on the vine due to public shaming. It became increasingly clear that the company would pay a steep price with the American public if it moved its headquarters to cut its U.S. tax bill - WAG stock plummeted 14.5% on news of the merger talks. Walgreens decided to nix the deal, and said in a statement that its status as "an iconic American consumer retail company with a major portion of its revenues derived from government-funded reimbursement programs" was a significant factor in choosing not to go through with the inversion. (You can get the full story on the failed Walgreen deal here...).

Despite Tuesday's market reaction, Money Morning Chief Investment Strategist Keith Fitz-Gerald believes Burger King is "doing exactly what it's supposed to do - maximize shareholder returns." Here's what he had to say about the BKW-THI deal on FOX Business' "Varney & Co." Monday afternoon.

That's why after public scrutiny dies down, BKW stock - and its investors - will benefit massively from this deal. Here are its most important details:

  • Burger King's market value is about $9.6 billion, and Tim Hortons is about $8.4 billion, so together the restaurant companies are currently worth about $18 billion.
  • 3G Capital - which owns about 70% of BKW stock - will continue its majority and own 51% of the new company, with the remainder held by existing shareholders of Tim Hortons and Burger King.
  • Based on Burger King's Aug. 22 closing price of $27.11, the deal is equal to C$89.32 a share and a 39% premium over the weighted average price of the stock over the 30 days leading up to Aug. 22.
  • For each Tim Hortons share owned, shareholders will receive C$65.50 in cash and 0.8025 common shares of the new company.
  • Once the deal is completed, BKW stock will be converted into 0.99 of a share of the new company, and 0.01 of a unit of a new Ontario limited partnership controlled by the new company.
  • The deal will create a stronger competitor to McDonald's Corp. (NYSE: MCD) and Taco Bell- and KFC-owner Yum! Brands (NYSE: YUM).
  • Burger King committed to $12.5 billion in financing to fund the cash portion of the merger. Berkshire Hathaway (NYSE: BRK.A) will pay $3 billion of preferred equity financing.

BKW stock has gone up 38.83% so far in 2014, and is good for a yield of $1.45 a share.

Another hot stock on the market right now is Tesla Motors Inc. (Nasdaq: TSLA). Year to date, TSLA is up 74% - and we think it'll double within the next 12 months. Here's why...