Tim Hortons accused of stale management
Hedge fund pushes for changes to serve shareholders better
TORONTO — Another round of pressure is being placed on Tim Hortons Inc. by significant shareholder Scout Capital Management, which wants the coffee and doughnut store operator to revamp its U.S. expansion plans and to raise debt levels to buy back shares.
Scout’s demands were contained in an open letter to the company’s board of directors Tuesday, and come a week after the New-York based hedge fund said it would press Tims to make changes to boost profitability.
Scout Capital praised Tim Hortons as a “wonderful business” with an iconic brand and unparalleled customer loyalty in Canada, but said its returns to shareholders can be dramatically improved.
The fund said it believed the company’s free cash flow could be doubled to $4.50 per share by 2015, which should result in the stock’s price rising to the range of $90 to $112. Tim Hortons shares closed at $56.29 Tuesday on the Toronto Stock Exchange, up $1.74 or 3.1 per cent.
“Tim Hortons is a very stable franchising business which enjoys predictable cash flow streams,” the letter said. “This is exactly the type of business that can and should operate comfortably with a higher degree of financial leverage than the company has chosen in the past, and than it seems to be hinting at for the future.”
Scout Capital is the second shareholder to push for changes at Tim Hortons this year, after a U.S. investment firm outlined its own hopes for the company.
Tim Hortons’ four largest publicly traded, highly franchised restaurant peers — Domino’s Pizza, Dunkin’ Brands, Burger King, and DineEquity — all have substantially higher leverage ratios, Scout Capital added.
The fund also urged Tim Hortons to curtail the use of its cash flow to fund real estate investment or new store purchases in the U.S., saying chains should only expand within “the constraints of a capital allocation discipline that has been sorely lacking.”
The last suggestion was that Tim Hortons bring its executive compensation framework more in line with a plan for long-term shareholder value and align management incentives with value creation targets.
“We believe the existing approach to executive compensation has partly contributed to the company’s underperformance, and we were disappointed that the board chose not to change these poor practices with the hiring of a new CEO,” the letter said.
“The company’s consistent and long-standing underperformance should long ago have been a wake-up call to Tim Hortons’ board and management.”
Scout said last week it had upped its ownership stake in the Canadian-based restaurant chain to 5.5 per cent and had engaged in discussions with senior management about Tim Hortons’ capital structure and expenditures, the timing and size of its share repurchases, management compensation metrics and technology investments.
Tuesday’s letter comes after unsuccessful attempts by Scout to meet directly with the board of directors to discuss its views, the hedge fund said.
In April, U.S. hedge fund Highfields Capital Management pushed for changes at Tim Hortons, asking the company to borrow $3.4 billion to buy back more than a third of its stock, create a real estate trust for its real estate assets and spin off or sell its distribution business.
Tim Hortons owns about 20 per cent of its more than 3,400 restaurant locations and kiosks, though most are leased. It also owns its corporate headquarters and distribution centres.
The company has faced stiff competition from coffee chains like Starbucks and fast food restaurants like McDonald’s and reported weaker quarterly results last month.
It is preparing for the arrival of new leader Marc Caira, a longtime senior executive at Nestle, who will take over from interim CEO Paul House next week.