Coca-Cola Enterprises’ plan to merge with two European bottlers and move its headquarters to Great Britain will likely cost Uncle Sam hundreds of millions of dollars in lost income taxes.
The deal announced earlier this month by the Atlanta soft drink bottler, a Spanish firm and a German company owned by Coca-Cola apparently will be the first so-called “inversion” by a big Georgia corporation, according to tax experts.
A wave of these controversial merger deals in recent years allowed dozens of companies to cut their federal tax bills by exchanging their U.S. citizenship for countries with smaller tax bites. That wave slowed to a trickle late last year after the U.S. Treasury Department came out with new rules making it tougher to use the mergers to avoid taxes.
But just in the past few weeks, a new wave of such deals have been announced by companies who believe they can meet the new rules’ requirements, including two others announced this month by CF Industries, an Illinois fertilizer company, and Terex, a Connecticut maker of industrial cranes.
CCE officials said the three-way merger is aimed at improving the combined companies’ operations by cutting costs and boosting sales, rather than chopping CCE’s tax bill.
“This deal is all driven by operational and strategic benefits,” CCE Chief Executive John Brock told investors recently. “This is not even remotely a tax-driven transaction. It’s a strategic and financial transaction.”
But if there was ever a case where a company needed to do an inversion merger to cut its tax bill, CCE is it, said Robert Willens, an independent tax analyst in New York.
“The only issue is why it wasn’t done before,” Willens said.
CCE earns almost all of its profits overseas, unlike most companies with substantial U.S. operations that did inversion deals.
Since a 2010 deal in which Coca-Cola bought all of CCE’s North American bottling operations, all of the bottler’s plants and sales are in Europe. Its only unit remaining in the United States is its 125-employee Atlanta headquarters.
As a result, CCE has had to tap its overseas profits to keep the lights on in Atlanta, triggering hundreds of millions of dollars in U.S. income taxes.
Typically, multi-national companies based in this country can avoid paying U.S. taxes on profits generated by their foreign units as long as the income remains invested overseas.
Most foreign countries have lower tax rates than the United States’ 35 percent corporate income tax rate. U.S.-based companies have to pay the difference between the U.S. rate and foreign countries’ rates on any overseas profits that they repatriate.
As a result, many big global companies leave a lot of money stashed overseas. Apple had $137 billion parked in lower-tax countries as of last year, while Coca-Cola had $19.5 billion, according to company filings to the U.S. Securities and Exchange Commission.
But since its 2010 deal, CCE has repatriated nearly $1.9 billion, about half of its total foreign profits. It used the cash to pay stock dividends, buy back its own stock and cover the employee salaries and other costs of its Atlanta headquarters. That has triggered $245 million in U.S. taxes on overseas profits since 2010, according to company filings.
“That’s pretty inefficient,” said Willens. “They’re paying substantial U.S. taxes on the repatriated profits.”
Will Atlanta headquarters remain open?
The three-way merger announced earlier this month would create a new London-based company, Coca-Cola European Partners Plc. Great Britain is CCE’s largest market, but since 1984, the country also has cut its top corporate tax rate from 52 percent to 20 percent, well below the U.S. rate.
The company will be the largest independent Coca-Cola bottler, with $12.6 billion in revenue.
CCE spokesman Fred Roselli said it’s “too early to speculate” on whether the new company will ultimately close CCE’s Atlanta office.
CCE kept its headquarters in Atlanta after the 2010 deal with Coke to ensure “management continuity” and to maintain connections with its investor base, he said.
“Our leaders were going to stay here in the U.S. That was important to us,” he said.
But the recent decision to merge CCE with two other European Coca-Cola bottlers and to locate the combined companies’ headquarters in Great Britain is “a natural evolution of our business in Europe,” said Roselli. “Any tax implications of the deal would be secondary.”
But Willens said the deal is clearly aimed at cutting taxes by giving the new company flexibility to tap its European cash and profits free of U.S. taxes.
“I think that is the largest motivation,” he said.
To meet the Treasury Department’s tough anti-inversion rules, the partners are doing a rather complicated transaction, expected to be completed by mid-2016. To keep CCE shareholders’ stake in the new company below 50 percent — which could make the transaction tax-free for CCE shareholders — the newly created company will take on $3.3 billion in debt to pay CCE’s shareholders $14.50 in cash per CCE share, along with one share in the new company.
That will give CCE’s shareholders 48 percent of the new company. Owners of the Spanish merger partner, Coca-Cola Iberian Partners, will have 34 percent of the new company. Coke will hold 18 percent after contributing its German bottling subsidiary to the venture.
Without the cash payout, CCE’s shareholders would end up owning about 58 percent of the new company, estimated Bonnie Herzog, an analyst with Wells Fargo Securities.
However, Willens said that without the cash payout, CCE’s shareholders might even have owned more than 60 percent. Above that limit, the IRS could still limit the new company’s ability to tap its overseas profits free of U.S. taxes.
“This is a complicated transaction, but I’m sure it will get done,” said Willens.
Still, he expects CCE’s shareholders to get hit with tax bills on the cash payments, and possibly on their new company stock as well, depending on how the deal fares under the tighter anti-inversion rules.
But most CCE shareholders will be happy with the deal anyway because the new company is going to do better with a lighter tax load, boosting the value of their shares, said Willens.
“In the short run they are going to pay tax,” he said. “In the long run it’s a very good deal.”
CCE’s share price has risen more than 15 percent, to more than $52 a share, since news of the planned merger surfaced in late July.
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