By Solarina Ho
TORONTO May 9 Tim Hortons Inc will
likely raise its debt levels and buy back shares, but Canada's
more conservative borrowing environment makes it improbable they
will be done to the extent an activist investor in the company
wants, the chief executive of the Canadian coffee-and-doughnut
chain said on Thursday.
Hedge fund Highfields Capital, which owns about 4 percent of
Tim Hortons shares, wants Tim Hortons to buy back more than a
third of its shares to boost shareholder returns, as well as
name new board members with more financial experience.
"We are a very healthy company and we want to stay a very
healthy company," outgoing CEO Paul House told Reuters after the
company's annual shareholders meeting in Toronto.
"Anything we do is going to be a long-term thing. We have
never looked at anything short term," said House, who is set to
hand over the company's reins to Nestle veteran Marc
Caira on July 2. "Our shareholders that have been with us a long
time, they hold our stock because they have confidence that we
are very conservative, long-term thinkers."
According to documents viewed by Reuters, Highfields wants
Tim Hortons to raise about $3.4 billion in debt and buy back
roughly 37 percent of its outstanding
House said Tim Hortons board has not yet decided on the debt
levels it is comfortable with, but it remains focused on
maintaining an investment grade rating and it would not go to
the levels suggested by Highfields.
"I don't think that we'd leverage up to that point, no, not
at all," he said.
"(Canadian) companies don't leverage up to the extent that a
lot of companies do in other parts of the world, that's for
sure," House added. "I think you've got to be very, very careful
in these unsettling times as to what you do from a leverage
point of view."
Tim Hortons shares closed down 2.4 percent at C$55.75 on the
Toronto Stock Exchange on Thursday.
Tim Hortons boasts that it sells eight of every 10 cups of
coffee sold in Canada, but analysts now question if the brand,
as much a Canadian symbol as hockey and the Maple Leaf flag, has
room for further growth at home.
With some 3,400 company-owned and franchised stores in
Canada, it faces a tough fight for market share as rivals such
as McDonald's and Starbucks step up the
House said Tim Hortons is looking at people with financial
expertise as it seeks to fill two vacant spots on its board, one
of the issues highlighted by Highfields. House said the board
already has financial expertise, but the death of board member
Ronald Osborne in April has left a hole in that area.
"While we do not question the operating backgrounds of many
of the current board members, we feel the company could benefit
from more financial expertise," Highfields said in a letter to
Tim Hortons' board. "We believe it imperative to upgrade the
board with new members who could help develop and implement a
more appropriate capital allocation strategy."
Boston-based Highfields, which manages more than $11
billion, also wants the chain to rein back its U.S. expansion
plans, either by entering into franchise agreements that require
less capital investment or scrapping U.S. expansion altogether.
The company says it won't pull back from the U.S. market,
but House reiterated that Tim Hortons is studying plans to work
with well-funded franchisees that could operate multiple U.S.
locations. He said more details are likely in the coming months.
Tough conditions in the first quarter led to heightened
competition for the chain and drove sales down at established
stores by 0.5 percent in the United States.
"A year ago, our U.S. business was flourishing, quite
frankly," House said. "The whole restaurant industry, especially
in the U.S. and in Canada - we've kind of just hit a cliff and
for whatever reason, things have slowed right down."
Sales at established Canadian stores were down 0.3 percent.
House said there is much for Caira to do when he takes over
in July, including drawing up the company's strategic plans
beyond 2013 and 2014.
"We've got lots of business initiatives going on. He's going
to get in a car that's moving, he's not going to get in a car
that's standing still," House said.