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Burger King in Talks to Buy Tim Hortons, Move HQ to Canada

Burger King in Talks to Buy Tim Hortons, Move HQ to Canada

Looking to lower taxes, Burger King is considering buying Tim Hortons and moving to Canada

Burger King is in talks to buy Tim Hortons and move its company headquarters to Canada.

Burger King is reportedly in talks with Canadian doughnut chain Tim Hortons to purchase the company and form what would become the world’s third-largest quick service restaurant chain, reports MarketWatch.

The deal would move Burger King’s headquarters to Canada and allow the company to move to a lower-tax jurisdiction in what is known as a tax inversion deal. Although the deal would create a new joint corporation, the two companies would continue to act independently.

Burger King is only the latest in many American companies to consider moving its headquarters abroad to cut down on corporate taxes. The move has faced considerable opposition in Washington as such moves mean cuts in tax revenue, and the White House is currently considering whether or not to take a harder line on inversions, according to The New York Times.

Presently, the American corporate tax rate is approximately 35 percent while the Canadian rate is about 15 percent. If Burger King does buy Tim Hortons, the company will be able to cut down on its current tax rate of approximately 27 percent.

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Karen Lo is an associate editor at The Daily Meal. Follow her on Twitter @appleplexy.

Burger King in talks to buy Tim Hortons in tax inversion deal

Burger King is in talks to buy doughnut chain Tim Hortons and create a new holding company headquartered in Canada, a move that could shave its tax bill.

Such an overseas shift, called a tax inversion, has become increasingly popular among US companies and a hot political issue. Burger King was founded in 1954 with a single restaurant in Miami, where it is currently based.

Shares of Burger King and Tim Hortons both jumped 17% before the opening bell, heading toward all-time highs.

In a tax inversion, a US company reorganizes in a country with a lower tax rate by acquiring or merging with a company there. Inversions also allow companies to transfer money earned overseas to the parent company without paying additional US taxes. That money can be used to reinvest in the business or to fund dividends and buybacks, among other things.

Companies like AbbVie, a pharmaceutical with its headquarters just outside Chicago, have tied up with companies overseas to achieve that type of tax cut. More recently, Walgreen backed away from such a plan under intense pressure and criticism at home.

Burger King and Tim Hortons cautioned on Sunday that there was no guarantee a deal would happen, and it’s not clear exactly how much a tie-up would reduce Burger King’s tax costs. But a recent report by KPMG found that total tax costs in Canada are 46.4% lower than in the United States.

Burger King said its majority owner, investment firm 3G Capital, would own the majority of shares of the new company if a deal were to happen.

Tim Hortons, known for its doughnuts and coffee, has been paired with US fast-food chains in the past. Photograph: Peter Jones /Reuters Photograph: Peter Jones/Reuters

3G Capital, which has offices in Brazil and New York, is known for its aggressive cost-cutting. The firm bought Burger King in 2010 and went to work trimming overhead costs and revamping operations before taking the chain public again in 2012. Last year, 3G also teamed with Berkshire Hathaway Inc to take HJ Heinz Co private in a $23bn deal, and has been cutting costs there as well.

Tim Hortons, known for its doughnuts and coffee, has been paired with US fast-food chains in the past. It was purchased by Wendy’s International Inc in 1995. Then in 2006 it completed an initial public offering and was spun off as a separate company.

Burger King and Tim Hortons say the deal would also allow the doughnut chain to accelerate its growth in international markets. The company had 4,546 restaurants at the end of June, with 3,630 in Canada, 866 in the US and 50 in the Persian Gulf area.

The companies say Burger King Worldwide Inc and Tim Hortons Inc, based in Ontario, would continue to operate as separate brands but would share corporate services. The talks were first reported by The Wall Street Journal.

The new company would have 18,000 restaurants in 100 countries with about $22bn in sales, which the companies say would make it the world’s third-largest fast-food restaurant company.

Burger King’s stock surged $4.29, to $31.40 before the market opened Monday. Shares reached an all-time high of $68.95 on Friday.

Shares of Tim Hortons jumped $10.66 to $73.50 before the opening bell. Shares of the Canadian company also hit an all-time high Friday at $68.95.

Burger King's Tax Inversion and Canada's Favorable Corporate Tax Rates

In an unexpected and interesting move, Burger King is in talks to buy Canadian coffee-and-doughnut chain Tim Horton's Inc., a merger that would be structured as a “tax inversion” which would effectively move Burger King’s headquarters to Canada (more specifically, my hometown of Oakville, Ontario). For those who are unfamiliar with Tim Horton's, the brand is tantamount to Canada’s version of Dunkin Donuts that could just as easily adopt its own version of the tagline “America Runs on Dunkin” (think “Canada Runs on Tim Horton's”). Tim Horton’s is no small coffee-shop chain. Tim Horton's, Canada’s largest coffee-shop chain, has a market capitalization of about $8.4 billion, while Burger King’s market capitalization is about $9.6 billion the proposed merger would form a new entity worth about $18 billion.

Inside a store belonging to Canada's largest coffee-shop chain, Tim Horton's, left, and Burger King's mascot "The King", right. Source: Reuters.

Canada’s Corporate Tax Rates Are Now More Favorable To U.S. Corporate Tax Rates

The really interesting part to the story however is not the fact that an American burger giant is buying up a Canadian national treasure (Wendy’s has previously owned Tim Horton’s for some time), but rather that Canadian corporate tax rates are favorable relative to American corporate tax rates enough to justify a “tax inversion”. A tax inversion occurs when an American company merges with a foreign one and, in the process, reincorporates abroad, effectively entering the foreign country’s tax domicile. An American company that merges with a Canadian target company for share consideration can avoid U.S. residency for tax purposes as long as the shareholders of the Canadian target end up owning at least 20% of the shares of the new parent immediately after the acquisition.

Canada’s corporate tax rate in Ontario of 26.5% (the federal rate of 15% plus Ontario’s provincial corporate tax rate of 11.5%) is considerably favorable to the American corporate tax rate of 35% thanks in large part to the conservative Canadian government led by Stephen Harper. The Harper government lowered the federal tax rate to 15% in 2012 down originally from 28% since it took office in 2006.

In fact, a recent KPMG Report, Focus on Tax, ranked Canada as the #1 country with the most business-friendly tax structure among developed countries when adding up a wide range of tax costs to businesses from statutory labor costs to harmonized sales tax. When comparing developed countries to what companies pay in the U.S. Canada came in at 53.6%, the U.K. came in at 66.6%, and the Netherlands at 74.5% of the U.S. corporate tax burden.

KPMG Focus on Tax 2014 Report

The additional tax revenue put into Canadian coffers from Burger King goes against the warnings of critics who argued that the lower Canadian corporate tax rates would threaten Canadian federal government revenues. Burger King Worldwide Inc. paid a tax bill of $88.5 million in 2013 according to their 2013 10-K filing, which after some reduction under the new tax rate would be deposited in the Canadian Finance Ministry rather than the U.S. Treasury.

Burger King is not the only American company to consider merging with a Canadian company to gain a more favorable tax rate. Valeant Pharmaceuticals International Inc., which had been based in California, combined with Canada’s Biovail Corp. in 2010 and redomiciled in Canada.

Canadian Prime Minister Stephen Harper. (Photo Credit: Henry Romero/Reuters)

White House and Treasury Looks To Curb Tax Inversions, Calling Tax Inverting Companies “Corporate Deserters”

Burger King’s possible merger to obtain the favorable Canadian corporate tax rate is a true reflection of the American corporate tax rate being the highest in the OECD. However, rather than taking the same stance on outright cutting the corporate tax rate, as the Harper government did, to keep the U.S. a competitive place to do business, President Obama calls tax inverting companies like Burger King "corporate deserters who renounce their citizenship to shield profits". At the urging of President Obama, Congress is considering a bill to make it harder for companies to change addresses abroad. Treasury Secretary Jacob Lew called for a “new sense of economic patriotism,” asking Congress to pass curbs to inversions. The Treasury Department currently is also preparing options to deter or prevent corporate tax inversions potentially on its own.

Interestingly, according to MarketWatch, Burger King does not plan to have a provision in a merger agreement that would allow it to walk away from a deal if laws are passed that diminish the benefits of inverting. For consumers who like to “Have It Your Way”, Burger King would operate more efficiently under a lower corporate tax rate and partner with a great Canadian brand, should the merger take place without interference.

Update Aug 25, 2014:Warren Buffett's Berkshire Hathaway Inc. is expected to provide about 25% of financing of the Burger King-Tim Horton's deal, thrusting Mr. Buffett, who has been vocal about individual income tax rates in the past, into the corporate tax inversion debate.

Burger King looks to buy Tim Hortons, move to Canada to save on taxes

CHICAGO — Burger King Worldwide Inc., the second-largest U.S. burger chain, is in talks to buy Tim Hortons Inc. and move its headquarters to Canada, becoming the latest American company seeking to relocate to a lower-tax country.

Burger King would create the world’s third-largest fast-food chain by merging with Canada’s bigger seller of coffee and doughnuts, the companies said in a statement. Canada’s corporate tax rate is 26.5 percent, compared with 40 percent in the United States, according to audit, tax and advisory firm KPMG.

The deal threatens to renew debate over American companies shifting their headquarters internationally in search of a lower corporate tax bill. The trend drew criticism last month from President Barack Obama. His aides vowed that the administration would take action to curtail the practice.

3G Capital, which has a 70 percent stake in Burger King, would own the majority of the shares of the new company, according to the statement. The two chains will operate as standalone brands, the companies said.

The combined business would have about $22 billion in sales and more than 18,000 restaurants in 100 countries, according to the statement. The deal is subject to negotiation, and Burger King and Tim Hortons don’t plan to comment further until an agreement is reached or discussions are discontinued.

Between mid-June and late-July, when Obama began criticizing deals that cut taxes by relocating outside the U.S., at least five large American companies have announced plans to make such a move — known as an “inversion.” That includes AbbVie Inc. and Medtronic Inc.

Since the start of 2012, at least 21 U.S. companies have announced or completed the deals, comprising almost half the total of 51 such transactions in the past three decades.

Tim Hortons, Canada’s biggest coffee merchant, has about 4,500 restaurants and has been expanding its product lines to boost sales. The Oakville, Ontario-based company’s stock rose 2.8 percent to a record C$68.78 on Aug. 22, the most recent trading day. The restaurant operator posted results this month that beat estimates and said fiscal 2014 profit will top or be at the high end of its target range.

Earlier this month, Burger King reported that revenue fell 6.1 percent to $261.2 million in the second quarter. Same-store sales in the U.S. and Canada rose 0.4 percent. The company has been trying to introduce fewer new items to make its kitchens faster and less complex.

The plan to move to Canada follows Burger King’s debut on the New York Stock Exchange in 2012. The chain had been taken private in 2010 by 3G, a New York investment firm, which got $1.4 billion in cash from the public offering.

Burger King In Talks To Acquire Tim Hortons, Move To Canada

Burger King is in talks to acquire Canadian coffee-and-doughnut chain Tim Hortons &mdash as well as Canadian citizenship &mdash the two companies said this morning.

The statement follows a report Sunday night in the Wall Street Journal saying that the Miami-based Burger King was looking to acquire Tim Hortons as a so-called tax inversion, which could lower its corporate taxes and help the company gain a more favorable treatment on money earned outside the United States. Shareholders of both companies cheered the news, with Burger King up over 14% in early trading to $31.08 and Tim Hortons up almost 19% to $74.69.

The deal would be structured such that a new company would be created, majority owned by the private equity firm 3G Capital, which acquired Burger King in 2010. The remaining stakes would be held by Burger King and Tim Hortons public shareholders.

For Burger King, a deal would be another step in its transformation into a lean, heavily financially engineered company with an ever-smaller retail footprint. While its main competitor, McDonalds, owns about a fifth of its locations, Burger King only owns 52 of its over 13,000 locations, according to data compiled by Bloomberg. Sixty-two percent of its $1.15 billion of revenues in 2013 came from royalties or renewal fees from its franchisees, while most of the remaining revenue came from leases or subleases of property to franchisees.

The companies said in their statement that Burger King's "worldwide footprint and experience in global development" could help "accelerate Tim Hortons growth in international markets."

There are over 13,000 Burger King locations in 100 countries, and about 58% of revenues come from the U.S. and Canada. Companies that pursue inversions typically have sizable revenues from outside the United States and having a different tax home can help those companies avoid the corporate tax hit on money earned overseas. Combined, the companies would have over 18,000 locations and $22 billion in sales across the brands.

While so-called inversion deals, where U.S. companies acquire smaller companies abroad and then move their corporate headquarters, have been common in the pharmaceutical industry this year, a Burger King inversion is likely to draw the most public attention.

The pharmaceutical chain Walgreen's recently scrapped such a deal after it came under withering public and political scrutiny. The Obama administration has been very critical of inversions, with the president describing companies that do them as "corporate deserters who renounce their citizenship to shield profits."

White House press secretary Josh Earnest declined to comment on the proposed deal when asked about it a press briefing. Democratic senator Carl Levin, who proposed a bill in May that would limit the ability of US companies to reduce their tax bills through overseas merger, issued a statement describing the potential inversion as an "example of why Congress can't afford to wait any longer to put a stop to tax dodging through this kind of merger." He added, however, that "there could well be a strong public reaction against Burger King that could more than offset any tax benefit it receives from a tax avoidance move."

Burger King Moving Into Canada, Buying Tim Hortons For About $11B

MIAMI (AP) — Burger King says it struck a deal to buy Tim Hortons Inc. for about $11 billion, a move that would give the fast-food company a stronger foothold in the coffee and breakfast market.

The corporate headquarters of the new company will be in Canada, which stands to help lower Burger King’s corporate taxes. Such tax inversions have been criticized by President Barack Obama and Congress because they mean a loss of revenue for the U.S. government. Burger King and Tim Hortons said the chains will continue to be run independently and that Burger King will still operate out of Miami.

The deal would create the world’s third largest fast-food company with about $23 billion in sales and more than 18,000 locations, the companies said.

The tie-up could help Burger King and Tim Hortons pose a greater challenge to market leaders such as McDonald’s and Starbucks and reflects a desire by both companies to expand internationally. Burger King, which has nearly 14,000 locations, has been striking deals to open more locations in developing markets. The company sees plenty of room for growth internationally, given the more than 35,000 locations McDonald’s has around the world. Tim Hortons has more than 4,500 locations, mostly in Canada.

Back in the U.S., breakfast and coffee have been hot growth areas in the fast-food industry. Between 2007 and 2012, breakfast grew faster than any other segment in the restaurant industry at about 5 percent a year, according to market researcher Technomic. But it has long remained a weak spot for Burger King.

McDonald’s Corp. led the category with 31 percent of the market in 2012, while Burger King Worldwide Inc. had just 3 percent to 4 percent, according to Technomic. As newer players such as Taco Bell have pushed into breakfast, McDonald’s has said it plans to put more marketing muscle behind coffee as a way to get more customers in the door.

3G Capital, the investment firm that owns Burger King, will own about 51 percent of the new company. The firm, which has offices in Brazil and New York, has been slashing costs at Burger King since buying it in 2010. Last year, 3G teamed up with Warren Buffett’s Berkshire Hathaway to buy ketchup maker Heinz as well.

Berkshire Hathaway is also helping finance the Tim Hortons deal with $3 billion of preferred equity financing, but will not have a role in managing operations.

Under the deal, Burger King will pay $65.50 Canadian ($59.74) in cash and 0.8025 common shares of the new company for each Tim Hortons share. This represents total value per Tim Hortons share of $94.05 Canadian (US$85.79), based on Burger King’s Monday closing stock price. Alternatively, Tim Hortons shareholders may choose either all-cash or all stock in the new company.

Tim Hortons stock rose more than 10 percent in Tuesday premarket trading. Burger King’s shares fell slightly.

Copyright 2014 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

Tax savings

Business commentator Michael Hlinka said on CBC Toronto's Metro Morning on Monday that Burger King may be making a "tax inversion" play with this move.

The basic U.S. corporate tax rate is about 35 per cent, while Canada's, depending on the province, is around 26 per cent. By merging with a Canadian company and setting up a head office in Canada, U.S. companies can sometimes achieve significant tax savings, Hlinka said.

"You've got to merge with a company one-quarter your size . then you can technically set up your headquarters in Canada, even though you still keep everybody in the United States. It's almost like a mailing address more than anything else," Hlinka said.

A number of U.S. pharmaceutical companies have tried similar moves in recent years, most notably Valeant, which bought up Mississauga, Ont.-based generic drugmaker Biovail in 2010. Valeant was U.S.-based at the time, but is now headquartered in Laval, Que., after buying what was then Canada's largest drug company.

Pfizer also recently tried to buy AstraZeneca in order to move itself to England, which has a much more favourable tax regime. Two other U.S. drug firms, Medtronic and AbbVie, are also in the process of trying to buy two Irish drug companies, again, largely for tax reasons.

Burger King going to Canada?

The fast food giant Burger King is discussing whether to buy Tim Hortons and reincorporate in Canada, a move that would slash its tax bill.

The merger would allow Burger King to relocate its corporate address to Canada and become perhaps the most well-known U.S. company to take advantage of a so-called inversion deal.

Such a move would increase the pressure on President Obama, who has suggested he would use his administrative powers to make inversions less appealing to companies if Congress doesn’t act to curb the deals.

Obama and Democrats have made the cross-border deals a part of their election-year message, believing it dovetails with their broader pitch on economic fairness. Treasury Department officials have said the agency is examining what steps the Obama administration could take on inversions, but a final decision could take weeks.

White House press secretary Josh Earnest declined to comment specifically on the proposed merger, but said the administration remained opposed to corporations inverting to avoid their U.S. tax obligations. A Treasury spokeswoman wouldn't comment on the possible deal, either.

Obama "doesn't believe that a company simply switching their citizenship, filling out a few papers to switch their citizenship to avoid paying their fair share in U.S. taxes is good policy," Earnest said. "It certainly isn't fair and it certainly isn't fair to the millions of middle-class families in this country that don't have that option."

Earnest said administration officials are reviewing ways the White House could take action without Congress to discourage inversions.

"They are considering a range of administrative options that are available to the administration to make those kinds of financial transactions less appealing to companies that may be considering them," he said.

The merger of Burger King and Tim Hortons, a Canadian chain known for its doughnuts and coffee, would create the third-largest fast food company in the world.

Burger King is discussing the inversion deal just weeks after another prominent retail chain, the pharmacy giant Walgreen, decided against reincorporating in Switzerland.

Walgreen, which still went through with the purchase of a European competitor, acknowledged that the potential consumer backlash played a role in its decision.

In recent weeks and months, leading pharmaceutical companies have followed through on inverting, after Pfizer jump-started Washington’s interest in the deals by trying to take over AstraZeneca. Almost 50 companies in all have reincorporated abroad in the last decade, according to the Congressional Research Service.

Congressional Democrats have sought legislation that would essentially make it impossible for a U.S. company to shift its address abroad if it merged with a smaller foreign competitor.

Democrats have also taken aim at the ability of those companies to get federal contracts and on the practice known as “earnings stripping,” which allows American subsidiaries to take tax deductions on interest payments following a loan from the foreign parent.

But any legislation is unlikely to gain much traction, which would put even more pressure on Obama to act. Republicans have generally said that companies will continue to have incentives to look offshore as long as the U.S. corporate tax rate remains at 35 percent.

GOP aides on Capitol Hill acknowledged that adding a prominent brand like Burger King would bring more attention to the cross-border deals. But they said they wanted to see more details about the possible merger before commenting on how much more pressure lawmakers would face on inversions.

A spokeswoman for Sen. Orrin Hatch Orrin Grant HatchThe national action imperative to achieve 30 by 30 Financial market transactions should not be taxed or restricted Bottom line MORE (Utah), the ranking Republican on the Finance Committee, said he was willing to work with Democrats on a "viable policy-driven, apolitical proposal.”

"Burger King's pursuit of an inversion only further underscores the arcane, anti-competitive nature of the U.S. tax code," said the spokeswoman, Julia Lawless.

"Short of a tax overhaul that will make it easier for American companies to invest and create more jobs at home, Sen. Hatch has advocated for an interim proposal to address the disturbing recent uptick in inversions."

Canada’s top tax rate is 15 percent after being lowered a couple of years ago.

But a person with knowledge of the potential merger between Burger King and the Ontario-based Tim Hortons insisted that taxes weren’t the driving force behind the potential deal, which was first reported by The Wall Street Journal.

Burger King’s effective tax rate is already at 27 percent, the person said, and wouldn’t be lowered too significantly after other Canadian taxes were taken into account.

“This is not a tax play,” the person said. “Taxes don’t make a case for why you would do this.”

Instead, the two companies said in a statement that a deal would allow both chains to expand their reach both in North America and around the world.

Under the potential deal, Tim Hortons and Burger King would continue to operate as stand-alone chains, while sharing corporate services. The merged company would have more than 18,000 restaurants in more than 100 countries, with some $22 billion a year in sales.

Burger King Announces Merger With Tim Hortons, Move To Canada

Burger King confirmed today that it is buying Tim Hortons. That's the doughnut and coffee chain headquartered in Canada. It is an $11-billion purchase. Burger King seems - sees a lot of things it likes in Tim Hortons, especially its Canadian address. And we'll talk about this and more with NPR's Jim Zarroli, who's covering the story. Hi, Jim.

JIM ZARROLI, BYLINE: Good morning.

INSKEEP: OK, so what's this new company going to look like?

ZARROLI: Well, this is going to bring together one of the United States's most popular fast-food chains - of course that is Burger King - with what is really an iconic, Canadian company. Tim Hortons started out 50 years ago as a coffee and doughnut chain. It's - you know, it's so Canadian, it's named for an ice hockey player.

It's expanded a bit into the United States over the years, especially in the Northeast. But I think it's not all that well-known in this country. The new company will continue to operate both Tim Hortons and Burger King as separate brands. It's going to have 18,000 restaurants, $23 billion in annual sales. I think, you know, as often the case in deals like this, there will be synergy, certain kinds of cost-saving that is helping - that's helping to drive the.

INSKEEP: Let's talk about the essential cost-saving here. We're told that part of the deal is that Burger King moves its corporate headquarters from the United States to Canada and that its tax rate changes. Is that right?

ZARROLI: Yes, Burger King now - well, let me put it this way, Burger King is now a U.S. company, so it has to pay U.S. taxes on the money and any money that it earns in different country. But by relocating, by having its headquarters relocate to Canada, it won't have to do that anymore. Instead it will have to pay the Canadian tax rate, which is a lot lower.

Now, there's also another way that companies that do these inversions can lower their tax bills. The Canadian parent company can lend money to its U.S. subsidiary. Then the U.S. subsidiary of course has to pay interest on the loan, and of course it can deduct that interest off its taxes. So this deal can end up lowering the taxes that Burger King will pay both on its domestic earnings and on the money it makes in other countries.

INSKEEP: Is this purely an on-paper change that saves them countless millions of dollars? Is the CEO actually going to move to Canada, for example, or are they going to continue to run the company out of Florida and just pay - just pay less taxes?

ZARROLI: Well, they say that their headquarters is going to be in Canada and usually.

INSKEEP: But are the executives moving, or is that not known?

ZARROLI: You know, they haven't said.

ZARROLI: But this deal is slightly different I think in - than a lot of inversions. In most inversions, the executives don't move. I mean, the company essentially stays in the United States, and the move is just on paper. This one appears to be a little bit different because they're actually - they say they're actually moving their headquarters to Canada.

INSKEEP: Ah, they say that, so we may find out some executives move - details yet to come. Is Burger King prepared for some blowback on this? President Obama has criticized these tax inversion deals. Some companies have found them a little unpalatable. What is Burger King saying about that side of it?

ZARROLI: Well, yeah, there's that - President Obama says he - that Congress should do something about this. Unfortunately, in the current political environment, there isn't a lot Congress can do. You know, I think what we can say is the deal is going to intensify the debate over inversions.

You know, most of the companies that have done this so far are not really that well-known to the public. You know, a lot of them have been pharmaceutical companies. But Burger King is, so I think this is going to going to get a lot more attention than the other deals. And I think it will have the potential anyway to really intensify the debate over inversions.

INSKEEP: And in a few seconds, Warren Buffett is involved for $3 billion here?

ZARROLI: Yeah. He won't have any role in the company. He's just financing it. He likes the company that owns Burger King, 3G Capital.

INSKEEP: OK, Jim, thanks very much.

INSKEEP: That's NPR's Jim Zarroli with confirmation of news today that Burger King plans to buy Tim Hortons and move its corporate headquarters to Canada. It's MORNING EDITION from NPR News. Transcript provided by NPR, Copyright NPR.

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