Waste Connections and Progressive Waste confirmed they are still planning to go ahead with a proposed merger a day after the U.S. Treasury Department outlined new proposed tax regulations on inversion deals.
In a research note, Stifel’s Michael E. Hoffman wrote that a “worst case scenario” would be a $15 million reduction in cash tax savings.
“If the Canadian parent company borrows $2.1B from third-party debt at 6% to lend $2.1B to pay off the WCN debt,” he wrote. “The US subsidiary gets the tax deduction of paying interest against US income at 35%. The savings would be about $35mm to $40mm. The difference is $10mm to $15mm from the original guidance.”
The Wall Street Journal has more details on the ramifications:
The companies said they had reviewed the regulations and determined they would dent combined adjusted free cash flow—a measure of profit estimated to be more than $625 million—by less than 3% in the first year after the deal is done.
On Monday, the Treasury Department imposed tough new curbs on corporate inversions, making it harder for companies to move their tax addresses out of the U.S. and then shift profits to low-tax countries using a maneuver known as earnings stripping.
The new rules—the government’s third wave of administrative action against inversions—shocked Wall Street and threw into doubt the $150 billion merger between Pfizer Inc. and Allergan PLC, which was on track to be the biggest deal of its kind.
The Treasury’s regulations would limit what is known as earnings stripping, a practice that follows many inversions and other cross-border acquisitions that helps lower companies’ effective tax rates.