* Activist shareholder pushes for debt-funded share buyback
* Fund wants Tim Hortons to create REIT for property assets
* Fund has raised its stake in the company to around 4 pct
* Shares close 4 percent higher on NYSE and TSX
(Adds background, company comment, analyst comment)
By Euan Rocha and Jessica Toonkel
TORONTO/NEW YORK, May 1 Highfields Capital, a
U.S. hedge fund agitating for change at Tim Hortons Inc
, may have a hard time convincing institutional
investors that the chain that says it sells eight out of every
10 cups of coffee in Canada needs a wake-up call.
The Boston-based activist investor, with an about 4 percent
stake in the company, wants Tim Hortons to boost shareholder
returns by taking on new debt to buy back its stock.
It is also pushing Tim Hortons to scale back its U.S.
expansion and focus more closely on its thriving Canadian
business. The fund, which also outlined a second tier list of
demands, wants Tims to spin off or sell its distribution
business, create a real estate investment trust to house its
property assets and bring in new directors with more financial
On Wednesday, Highfields confirmed an earlier exclusive
Reuters report about the proposals, and said it currently owns
6.1 million shares of Tim Hortons. The fund said the company is
studying its proposals and it looks forward to continuing a
dialogue with Tim Hortons.
But the proposals may not be so easy to sell to long-term
investors, according to some money managers and investors.
"This business ain't broke and needs no fixin'," said Barry
Schwartz, a portfolio manager at Baskin Financial, which owns
roughly 130,000 shares in Tim Hortons, according to Thomson
"The company is shareholder-friendly and has rewarded
long-term investors with rising dividends and share buybacks,
plus the stock performance since the IPO has been terrific," he
The shares have more than doubled in value since an IPO in
March 2006, when Wendy's Co spun off Tim Hortons.
The proposals from Highfields represent the latest attempt
by a U.S. hedge fund to shake up a Canadian company.
Last year, Bill Ackman's Pershing Square won big change at
Canadian Pacific Railway after a bitter public battle.
Earlier this year, fertilizer company Agrium Inc fended
off an attempt by its biggest shareholder, U.S. hedge fund Jana
Partners LLC, to break up the company and defeated Jana's slate
in a hard fought proxy battle.
Highfields has made demands that are similar to those put
forth by Jana in its fight at Agrium. The fund wanted Agrium to
spin off or sell its retail arm and add people with more
experience in retail to its board.
But David Baskin, the head of Baskin Financial, sees big
differences between the situation facing Highfields and Ackman's
successful proxy fight at CP Rail, which resulted in a sweep for
"Canadian Pacific had a tired board with weak management,
chronic underperformance and restive shareholders," he said.
"None of that applies to Tim Hortons, which I think is still
widely liked by institutional holders."
Tim Hortons' stock has rose about 60 percent over the last
five years, while the Toronto Stock Exchange's S&P/TSX composite
index has fallen roughly 13 percent over the period.
That said, shares of some of Tim Hortons' U.S.-based rivals
have outpaced the Canadian chain.
McDonald's Corp shares have climbed about 70 percent
over the same period, while Starbucks Corp has nearly
quadrupled in value.
"Tims' performance has been somewhere between good and very
good, given economic conditions in a hyper-competitive sector.
So I would guess it will be hard for these guys to get traction
but maybe the stock will respond anyway," Baskin said.
The shares closed up 4 percent at $56.32 on the New York
Stock Exchange on Wednesday, while Tims' Toronto-listed shares
rose by a similar margin to C$56.77.
Despite its growth and strong performance, analysts concede
that the Canadian coffee chain faces strong headwinds.
Analysts have questioned whether the brand - which arguably
trails only hockey and the maple leaf as a symbol of Canada -
can continue to grow at home.
Tim Hortons - with some 3,400 company-owned and franchised
stores in Canada - has virtually saturated the market. At the
same time, U.S. rivals such as McDonald's and Starbucks have
also stepped up their presence north of the border, limiting
Tim's organic growth potential.
"We don't view either player as an immediate threat to Tim
Hortons' scale and strong brand perception," said R.J. Hottovy
an analyst at Morningstar. "But we believe competition will
become increasingly fierce in the decade to come, leading to
more aggressive price wars."
Highfields may have some success in building a case for
spinning off Tim Hortons' real estate assets into a new publicly
traded REIT - a path that other players have taken. Canada's top
food retailer, Loblaw Cos, said earlier on Wednesday that
it plans to complete the initial public offering of its REIT in
"Canada is a more conducive market than the U.S. right now,
when it comes to REIT conversions," said Hottovy, noting that a
company spinning off the assets can still maintain a controlling
interest in a REIT in Canada.
Tim Hortons in the past has panned the REIT idea, as it owns
only 20 percent of its retail real estate assets. The company
declined to comment beyond saying it remains focused on creating
"(We) always welcome constructive dialogue with our
shareholders. We don't comment on specific conversations," said
Tim Hortons spokesman Scott Bonikowsky.
Highfields also faces a tough task convincing long-term
investors that a debt-funded share buyback is a sound plan.
John Goldsmith, deputy head of equities at Montrusco Bolton,
a firm that owns nearly 260,000 Tim Hortons shares, questions
whether the strategy makes sense over the long term, even though
low interest rates have made it more attractive for activists to
push companies to take on cheap debt to fund buybacks.
"This might temporarily add value per share mathematically,
the question is does this create sustainable value add or simply
a one-time pop?" he said.
RBC Capital Markets analyst Irene Nattel said layering on
$3.4 billion in debt to fund a buyback might add to earnings.
But it puts Tim's investment-grade rating at risk, potentially
raising borrowing costs and moderating any earnings per share
gains for the company.
Tim Hortons is being advised by Citigroup Inc and RBC
Capital Markets - both banks declined to comment.
(Additional reporting by Solarina Ho and Allison Martell;
Editing by Frank McGurty, Bernard Orr)