HIGHFIELDS CAPITAL URGES REITS SPIN-OFF FOR TIM HORTONS
(The following press release from Highfields Capital Management LP was received by e-mail and was reformatted. The sender verified the statement.)
HIGHFIELDS CAPITAL STATEMENT ON NEWS REPORTS ON TIM HORTONS INC.
Boston, Massachusetts, May 1, 2013 - In light of news reporting in the past 24 hours, Highfields Capital Management LP today provided the following information regarding its correspondence with Tim Hortons Inc. (TSX: THI, NYSE: THI) ("the Company") to ensure there is a clear understanding of the facts. Highfields Capital Management funds currently hold 6.1 million shares of Tim Hortons Inc. or approximately 4% of the outstanding shares.
In the middle of March, representatives of Highfields met with the Company's management, after which, on March 21 (nearly six weeks ago), Highfields sent a follow-up letter to the Company. That letter was intended to continue a constructive dialogue with the Company and to be confidential. Yesterday, it was leaked to a media outlet by the Company or one of its advisors.
The letter noted that Tim Hortons is a world-class company, with extraordinary brand recognition and great growth opportunities in Canada. It also outlined two primary recommendations, both designed to improve operating performance and the Company's capital structure, in order to create value for the benefit of all shareholders. They include discontinuing capital investment in the Company's U.S. expansion strategy (which has not been successful) and a recapitalization to take advantage of low interest rates and materially increase returns on equity and earnings per share growth. The letter also alluded to other levers that potentially could lead to value creation, but such measures are not the primary focus. Given incorrect speculation about the content of the letter, a copy of the full letter is attached.
Highfields looks forward to the results of Tim Hortons' study of these alternatives and to continuing its dialogue with the Company.
About Highfields Capital Management:
Highfields Capital Management is an $11 billion value-oriented investment management firm which manages private investment funds for endowments, charitable and philanthropic foundations, pension funds and other institutional and private investors. Highfields' funds invest worldwide in public and private companies across a wide variety of industries and security types. The firm was founded in 1998 and is based in Boston, MA.
LETTER SENT BY HIGHFIELDS CAPITAL MANAGEMENT TO TIM HORTONS ON MARCH 21, 2013
Mr. Paul D. House Executive Chairman, CEO & President Tim Hortons Inc. 874 Sinclair Road Oakville, Ontario L6K 2Y1 Canada
Dear Paul: Thank you for taking the time to meet with us on March 8 in Toronto. Tim Hortons is a world class company of which you should be proud. Your brand recognition in Canada is second to none, and our research supports the view that there are great growth opportunities ahead, especially on the west coast of Canada and in Quebec. As one of your largest shareholders, and one who has followed the company closely for nearly a decade, we thought it important to follow up in a formal matter.
While we appreciated the frank discussion with respect to the current state of the business, the U.S. growth strategy and capital allocation, we came away concerned that the company and its board lack both understanding and a sense of urgency on the latter two issues.
Specifically, with respect to the U.S. growth strategy, your insistence that a capital light approach would have to wait until after the announcement of a new CEO and the subsequent determination of his or her strategic plan was disappointing. With respect to capital allocation, your rationalization that the company's corporate structure is so complicated that it would make it difficult to recapitalize the company in an efficient manner rings hollow. Your reticence to explore a REIT for the same reason also rings hollow. While we do not doubt your sincerity, we believe that these issues could be overcome, as do financial advisors who have considered these same issues.
We believe a unique opportunity exists for Tim Hortons to create material shareholder value by recapitalizing the company and taking advantage of today's historically low interest rates. While having no impact on the underlying business, this strategy would materially increase returns on equity and EPS growth. There is nothing that we are recommending that your competitors are not already doing. All we are suggesting is that you follow the proven success stories of Dunkin' Brands and Domino's. In fact, we would argue that the earnings growth created through this approach would be far superior (at much lower execution risk) than attempting to drive growth through continuing to invest in the U.S. market at sub-par returns.
On this important point, we believe Tim Hortons should immediately reorient its U.S. expansion strategy to a capital light approach or scrap it altogether. Returns to date do not justify further material investments in this business. While we too are hopeful that the existing U.S. business may well be turning a corner and that much seed corn has been planted, we think now is the perfect opportunity to entice third party capital with franchise and master licensing agreements in the U.S. similar to the Tim Hortons capital light approach used in the Middle East.
By taking these two straightforward actions and converting part of the business to a REIT, we believe Tim Hortons will materially increase shareholder value as a result of (i) higher returns on capital (ii) higher returns on equity, and (iii) higher per share earnings growth. Again, this earnings growth would be achieved by reducing the equity base through capital return as opposed to investing capital into the U.S. at sub-par returns. In our view, the shares could approach or exceed $100 within 12-18 months by following this approach as Tim Hortons' stable cash flows, revitalized earnings growth and higher returns would result in a material revaluation of the shares. Details supporting this can be found in the attached presentation.
When we discussed the opportunity to recapitalize the business or the potential for a REIT, the answers you gave us were not satisfying. Instead of listing all of the reasons why the strategy cannot work (structuring difficulties, operating leases not suitable for a REIT, branding issues etc.), we think a preferable approach would be to determine what the proper capital structure looks like and then figure out the most effective way to get there.
To this point, 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. We believe it imperative to upgrade the board with new members who could help develop and implement a more appropriate capital allocation strategy. To this end, we would be happy to engage with management and the board on potential candidates.
Attached to this letter is a presentation that puts some numbers behind our suggestions. We look forward to continuing this dialogue and would welcome the opportunity to directly share our views with the board.
Sincerely, Daniel S. Farb Peter R.O. Fleiss Managing Director Managing Director Cc: Ms. Cynthia J. Devine
Mr. Scott Bonikowsky