Canada's Progressive Waste Solutions merged with Texas-based Waste Connections in a friendly $2.67-bill (U.S.) deal. But it's not clear what the Canadian company gets out of it.
Usually when two companies merge in a friendly deal, their management teams go on and on about the combination's benefits. Not so for Canada's Progressive Waste Solutions Ltd.
Even though its board unanimously approved the $2.67-billion (U.S.) merger with Texas-based Waste Connections Inc., it isn't quite clear what the Canadian company gets out of it.
Asked in a conference call on Tuesday about how the merger process went down and why he pursued the deal, Progressive chief executive officer Joe Quarin demurred, saying little more than to look to a coming corporate filing for more details. How inspiring.
The deal strategy is also coloured by the tax issue. Although it foresees cost synergies and better revenues, Waste Connections was not shy about its intentions to be domiciled in Canada, even though the combined company will be run out of Woodlands, Tex., where the buyer is currently based. The reason: a tax inversion.
"As you know, Progressive Waste enjoys in their Canadian operations the benefit of a lower corporate tax within Canada," Waste Connections CEO Ron Mittelstaedt said on the call. "The short version is, we sort of achieved the best of both companies' tax situations from the way the structure [is] derived," he said. "It's pretty straightforward after that."
Tax inversions, as a reminder, have become increasingly common for U.S. companies, which pay one of the highest corporate tax rates in the developed world. By acquiring a company in a country such as Canada or Ireland, they can change their domicile, allowing them to follow the target's corporate tax rules. Blockbuster examples of such deals in recent years include Burger King buying Tim Hortons and Valeant Pharmaceuticals merging with Biovail.
The tax inversion alone doesn't mean a merger is necessarily bad. As one corporate lawyer once made clear to me, all inversions do is offer U.S. companies the right to follow tax rules adhered to by their rivals in other Western markets. Where these deals go awry is when tax rules are abused, with too many revenues getting booked overseas in order to lower the overall tax rate – something that is easier to do under a tax code such as Canada's.
But the Progressive Waste acquisition has an extra wrinkle. From the hop, its CEO, chief operating officer and chief financial officer have all announced they are leaving the company – or will leave soon. Acquired management teams often leave, so this isn't all that surprising. But usually they give a little leeway and go quietly once the deal has closed.
The exits, coupled with very few disclosures about why Progressive Waste was put up for sale, coupled with the tax inversion, hang a few clouds over the deal.
There probably will not be a way for outsiders to assess if the deal is good for Canada. Because the acquisition was structured as reverse merger, it will not be reviewed under the Investment Canada Act.
However, Progressive Waste shareholders will get to vote on the acquisition, and they should make sure that it truly makes sense. It very well could. Their management team made some blunders in the past, so their departures might not be all that bad. But the last thing we need is to blindly allow a U.S. company to rent our tax code.
Tim Kiladze