Canada's Tim Hortons Inc. is under mounting pressure from activist investors to boost shareholder value a few weeks before a new CEO takes over after a second hedge fund said it had amassed a big stake in the coffee and doughnut chain.
Tim Hortons shares jumped more than 4 percent on Tuesday after New York-based Scout Capital Management said it boosted its investment to 5.5 percent and met with management to discuss issues such as capital structure.
Highfields Capital is already pushing the company, whose brand is as much a Canadian symbol as ice hockey and maple syrup, to take on debt, buy back shares and overhaul or scrap its U.S. expansion plan. The Boston-based activist investor held a 4 percent stake in Tim Hortons as of early May.
Analysts said the stock moved up on expectations that Scout and Highfields can work the same kind of magic as other activist investors.
Bill Ackman's Pershing Square Capital Management recently said it would sell part of its stake in Canadian Pacific Railway Ltd. after a tough proxy battle and management overhaul led to a tripling of its share price.
"People are expecting that, perhaps with this investor (Scout) stepping in, changes could be afoot," said Gareth Watson, vice president of investment management and research at Richardson GMP. "It's no slam dunk at all that happens, but certainly speculation picks up."
But any change at Tim Hortons must await the arrival of new Chief Executive Officer Marc Caira, a long-time Nestle executive, who takes over on July 2.
Outgoing CEO Paul House told Reuters last month the company would likely increase its debt and purchase shares, but probably not at the level Highfields wanted.
Scout Capital, a low-profile U.S. hedge fund that says it specializes in restaurant investments, would not say if it was working in concert with Highfields.
Tims, as it is affectionately called in Canada, says it will not pull back from the U.S. market. But it is studying plans to work with deep-pocketed franchisees who could operate multiple locations there.
Tough competition in the first quarter contributed to a 0.5 percent drop in sales at established U.S. outlets.
With some 3,400 company-owned and franchised stores in Canada, Tims cannot easily expand at home, where it faces tough rivals such as McDonald's Corp. and Starbucks Corp. .
"Canada is saturated and maybe they need to start working with a partner that has a better idea of how to break into the U.S. market," said Barry Schwartz, vice president and portfolio manager at Baskin Financial Services, which holds 130,000 Tim Hortons shares.
"Their strategy in Dubai and the Emirates and Saudi Arabia is the type of strategy I think some large activist investors want to see them use as they go into the U.S."
Tim Hortons, which says it sells eight of every 10 cups of coffee sold in Canada, recently announced a franchise deal with Apparel FZCO to open as many as 100 restaurants in Saudi Arabia in the next five years. That follows a deal with Apparel to open up to 120 locations in Arab states, including Qatar and Kuwait.
LOWER MULTIPLES
Schwartz said Tim Hortons is not a poorly run company, but it might be attracting activist investors because it trades at lower multiples than U.S. chains such as Chipotle Mexican Grill Inc., Starbucks or Panera Bread Co.
"Tim Horton's valuation significantly trails that of other 100-percent franchised business models and more active balance sheet management could, in our view, partially close that valuation gap," Bank of America Merrill Lynch analyst Joseph Buckley wrote in a note.
Scout Capital said in a filing on Monday that it had discussed optimal capital structure, share repurchases, management compensation, technology investments and other matters with Tim Hortons and it expects talks to continue.
Founded in 1999, Scout said it makes "concentrated investments" in businesses that are "misunderstood and incorrectly valued by the markets."
It disclosed last month that it is also taking an activist role at DineEquity Inc., owner of Applebee's and IHOP restaurants. With a 6.6 percent stake in the restaurant operator, Scout said it was talking to management about capital structure, debt refinancing, and other matters.
A mostly passive investor to date, it has positions in a number of blue-chips, including Apple Inc., Amazon.com Inc., Anheuser Busch Inbev SA and Intel Corp.
Tim Horton shares added C$2.17 to close at C$56.05 on the Toronto Stock Exchange on Tuesday.
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