Thursday, August 28, 2014
The months long battle for control over Market Basket ended this morning with Arthur T. Demoulas, the ousted CEO who had the support of employees, buying the 50.5% of the company that his side of the family did not already own from Arthur S. Demoulas and his side of the family. So, all is well in Tewksbury? Certainly everyone is happy today. Arthur T. is back in place and mangement and employees are all on the same page trying to get the company moving again. Soon enough food will be back on the shelves and everything will get back to normal. Maybe.
Why just maybe? Remember this is a privately held family company. Many of the corporate changes pushed by Arthur S. and his side of the family involved cutting costs and moving the company into a position to put itself up for sale to another large competitor in the grocery space or to a private equity buyer. Those changes enraged workers who liked the fact that the family business treated them like ... family. The changes sought by Arthur S. challenged the corporate culture and understandly generated a backlash.
So, why isn't the return of Arthur T. just great news for Market Basket and its employees? Well, the cost of the acquisition may come back to haunt everyone at Market Basket. To do the deal, Arthur T. had to mortgage all the company's New England real estate and accept a $500 million investment from a private equity firm (Blackstone). All that equity with its "soft edge" that allowed Arthur T. to manage the firm over the past few years as a family business, paying above market wages and demonstrating loyalty to employees in hard times has all been replaced by "hard edged" debt and a private equity investor who will demand a return and probably look at labor costs with more of a gimlet eye.
And the retail grocery business typically operates on tight margins anyway. You wonder why grocery stores have moved into prepared foods? Sure, we're all busy, but prepared foods generate huge margin. Not a lot of that going on at Market Basket.
So celebrate today. But, I expect things will be difficult up in Tewskbury for some time to come.
Wednesday, August 27, 2014
If you haven't already seen this, I highly recommend using Rank and Filed (rankandfiled.com) to access all your EDGAR documents. It's a free search engine and it's really quite good. I'm never going back to the SEC's EDGAR site again... OK, no more gratuitous plugs.
Tuesday, August 26, 2014
Earlier this month I thought perhaps that when Walgreens stepped away from the edge that we had seen the high water mark of the inversion movement. But, I guess I was wrong (not for the first or last time). This morning Burger King announced its acquisition of Canada's Tim Horton and its simultaneous move to Canada. Burger King describes the transaction in the following way:
Upon completion of the transaction, each outstanding common share of Tim Hortons will be converted into the right to receive C$65.50 in cash and 0.8025 of a common share of the new parent company, which is subject to the right of the holders of Tim Hortons common stock to make elections as noted above. Upon completion of the transaction, each outstanding common share of Burger King will be converted into 0.99 of a share of the parent company and 0.01 of a unit of a newly formed Ontario limited partnership controlled by the new parent company, however, holders of shares of Burger King common stock will be given the right to elect to receive only partnership units in lieu of common shares of the new parent company, subject to a limit on the maximum number of partnership units that can be issued.
Shares of the new parent company will be traded on the New York Stock Exchange and the Toronto Stock Exchange and units of the new partnership will be traded on the Toronto Stock Exchange. The partnership units will be convertible on a 1:1 basis into common shares of the new parent company, however, the units may not be exchanged for common shares for the first year following the closing of the transaction. Holders of partnership units will participate in the votes of shareholders of the new parent company on a pro-rata basis as though the units had been converted. 3G Capital has committed to elect to receive only partnership units.
The transaction is expected to be taxable, for U.S. federal income tax purposes, to the shareholders of Burger King, other than with respect to the partnership units received by them in the transaction. The transaction is expected to be taxable to shareholders of Tim Hortons in the U.S and Canada.
3G will be receiving only partnership units in the transaction. The effect of which will be to permit 3G, the controller, to defer capital gains taxes - the inversion penalty - until a later time when the partnership units are converted to stock in the Canadian Burger King entity. Nice trick. Too bad most of the public stockholders aren't going to be able to do that.
Of course, the Burger King folks say the deal isn't about taxes. It's about ... synergy.
Burger King executives say that isn’t the case, and Whopper devotees should take them at their word. Canada’s corporate tax rate is 26.5 percent, which is considerably lower than the 40 percent rate in the U.S. But Burger King only pays an estimated 27 percent. “We don’t expect our tax rate to change materially,” Burger King Chief Executive Daniel Schwartz said in a conference call today. “This transaction is not really about taxes. It’s about growth.”
OK. So, if it's not about the taxes, can someone explain why the relocation to Canada? Elsewhere, Vic Fleischer weighs in again on the inversion issue.
Friday, August 22, 2014
Berkshire Hathaway reminds us that HSR can be tricky business. They just agreed to pay close to $900k in fines to settle a lawsuit from the DOJ in connection with a transaction in which Berkshire converted some notes before cashing out of a stock. The NY Times describes the transaction:
Behind Berkshire’s violation was an old investment in USG, a producer of construction materials like drywall. In 2006, Mr. Buffett’s company owned about 19 percent of USG. Two years later, Berkshire bought $300 million worth of securities known as convertible notes, which allowed the conglomerate to swap out for common stock in the materials maker at a price of $11.40 a share.
Late last year, USG said it would redeem $325 million worth of convertible notes, and Berkshire took advantage by cashing out its holdings, taking its stake up to 26 percent. Yet Berkshire did not file for Hart-Scott before exercising its right to trade in the convertible notes.
Remember for purposes HSR,covered transactions are defined very broadly. This broad definition can trip up even the most sophisticated investors - like Berkshire Hathaway or even Barry Diller last year.
Tuesday, August 19, 2014
That question is still a bit of a mystery. Still no real answer, but like the SAT test we can start to eliminate the obviously wrong answers. From a paper by Ed Kleinbard, Competitiveness Has Nothing to Do With It (h/t Dealbook), we can eliminate the competitiveness canard. Here's the abstract:
Abstract: The recent wave of corporate tax inversions has triggered interest in what motivates these tax-driven transactions now. Corporate executives have argued that inversions are explained by an "anti-competitive" U.S. tax environment, as evidenced by the federal corporate tax statutory rate, which is high by international standards, and by its "worldwide" tax base. This paper explains why this competitiveness narrative is largely fact-free, in part by using one recent articulation of that narrative (by Emerson Electric Co.’s former vice-chairman) as a case study.
The recent surge in interest in inversion transactions is explained primarily by U.S. based multinational firms’ increasingly desperate efforts to find a use for their stockpiles of offshore cash (now totaling around $1 trillion), and by a desire to "strip" income from the U.S. domestic tax base through intragroup interest payments to a new parent company located in a lower-taxed foreign jurisdiction. These motives play out against a backdrop of corporate existential despair over the political prospects for tax reform, or for a second "repatriation tax holiday" of the sort offered by Congress in 2004.
There are a couple of points worth noting. First, Kleinbard makes the point that is obvious to most tax lawyers - there's a difference between the corporate tax rate of 35% and the effective corporate tax rate. The former is like paying the rack rate for a room at the Four Seasons. The second is like getting that same room on Priceline. Kleinbard relies on SEC filings to estimate the effective tax rate for Mylan:
In 2013, Mylan derived about 57 percent of its worldwide revenues (essentially, gross receipts) from the United States, yet, as just noted, told investors that its worldwide effective tax rate was 16.2 percent. Assume, just by way of illustration, that Mylan’s taxable profits followed its revenues as allocated for financial accounting (and presumptively, management) purposes – admittedly, a heroic assumption, thanks to stateless income planning internationally, and tax expenditures domestically – and that Mylan, through adroit domestic tax planning, incurred a 25 percent effective tax rate in respect of its U.S. income (federal and state taxes combined). This would imply that Mylan’s tax expense in respect of its foreign profits was roughly 4.5 percent.
AbbVie is another recent inverter. What was their effective rate before going offshore? Kleinbard estimate for us:
AbbVie ... reported in its 2013 annual report’s tax footnote an 11.5 percent reduction for 2013 in its global statutory tax rate for “the effect of foreign operations.” (The effect of foreign operations was a much greater number in 2011 and 2012.) Again, this means that AbbVie is telling investors and its own managers that it does not operate in a 35 percent tax rate environment at all; to the contrary, AbbVie’s effective global tax rate for 2013 (again, including U.S. taxes on its U.S. domestic income, where permanently reinvested earnings are irrelevant), after some smaller permanent differences in both directions, was 22.6 percent. This is a “permanent” tax discount of about one-third off the headline federal rate, insofar as AbbVie’s investors and management are concerned.
Kleinbard also takes on the idea that inversions are being caused by "trapped cash" off shore. That's the argument that directors are unwilling to bring foreign profits back to the US because they are unwilling to pay US taxes to make that happen. Some directors say their fiduciary duties prevent them from bringing that cash back. I disagree. In any event, he discounts that the "trapped cash" argument as real.
Finally, he takes on the competitiveness fable. He calls the competitiveness claim a claim without fact. It's worth reading.
In the meantime, I'm still looking for an answer.
Friday, August 15, 2014
For those of you not from the Boston area, the whole Market Basket saga has not been a part of your summer. Around here, it's been a huge story. The ten cent version: Market Basket is a regional grocery chain that happens to be family owned. Here's the problem, the family is divided by bad blood over control of the business. Until recently, the business was run by Arthur T. Demoulas. He was popular with employees and by all account did well by them. That was until he was ousted by his cousin, Arthus S. Arthur S. and his group trimmed costs and seemed to be preparing the company for a sale. There's been a public fight over control since then. Managers have walked out, store shelves have been left bare. Today, employees are facing a return to work or be fired ultimatum.
To get a sense of the dysfunction at the company, the Boston Globe just published minutes of some board meetings. How dysfunctional is the board at this point? Well...their minutes take the form of a transcript taken by a professional stenographer. Sheesh. It's pretty clear that when you roll in the stenographer, no one trusts anyone in the room. But it's thanks to the stenographer, that we can enjoy the board room repartee that goes on at Market Basket:
In October 2011, [Nabil] El-Hage asked Arthur T. whether he thought he had unlimited spending authority as chief executive.
“I do not know of any restriction that’s out there, and I do not care to have any restriction, quite frankly,” Arthur T. said.
“You’re not Catholic, are you, Arthur?” El-Hage said. “That’s a serious question. You’re Greek, so you practice Greek Orthodox.”
“Right,” Arthur T. replied.
El-Hage zeroed in on his point: “That explains it, because in my religion we believe only the pope is infallible.”
Yikes. This is the board room culture at Market Basket. It's a pretty good bet that this company will be sold at some point in the near future. When it is, it's going to take a lot of TLC to put it back together again.
Thursday, August 7, 2014
Vic Fleischer's got his take on how to deal with inversions up at the Times site. He calls it, aptly, a dispute between law and politics. That's about right. There's also a link to a video of Obama on the inversion issue.
It's starting to feel like there may be some movement to close the escape hatch without Congress getting involved. In that case, Richard Beales has a reminder for why those left behind shouldn't worry so much. You get a lot for being a US corporation.
Wednesday, August 6, 2014
Walgreens had been working on and considering an inversion for some time, but today it dropped plans to relocate to the UK and announced that it would purchase all of the shares of Alliance Boots (UK) that it did not already own. Does Walgreens' decision to step away from the inversion edge mark the crest of the inversion wave we've been experiencing this summer? Well, yes and no.
Let's start with the no. So long as differential tax rates create opportunities for firms to arbitrage tax rates, there will always be an incentive for firms to pursue inversions. For that reason, any response to the inversion wave that is primarily focused on lowering effective corporate tax rates is a long-term loser. Why? Because until you get to zero, there will always be a jurisdiction with a lower rate. There is will always be an economic incentive to pursue tax arbitrage. My take? Any effort to compete on lower tax rates is a fool's errands. US rates are relatively higher than other jurisdictions, but the effective corporate rate in the US - let's be honest - isn't all that high. So, the incentive to do these deals is likely here to stay.
How about the yes? Well, it's one thing if Mylan does an inversion, most people don't know what that company is. When politicians rail against Mylan for fleeing the US, it doesn't really resonate. But, Walgreens is a different story. There is a Walgreens in almost every town in Massachusetts and they are front and center in many people's lives around the country. My guess is that if Walgreens were to relocate outside the US, the political salience of the inversion question would be sky-high. Perhaps the board saw that coming and decided discretion was the better part of valor.
Friday, August 1, 2014
The WSJ points out the untidy fact that although corporate inversions may have the effect of permitting firms to elect to move to lower tax jurisdictions, they do so through taxable transactions for stockholders of the US firm seeking to expatriate. Remember, the US firm in these deals is theoretically the seller. And, because the consideration used in these transactions is stock rather than cash, stockholders will have to come up with cash to pay the tax necessary to do the deal. Ugh.
Over the past couple of days, I've heard a couple of narratives about why inversions are now all the rage. In honesty, the one that rings most true is the one about the bankers pitching the next big thing...