Highfields Capital Statement on News Reports on Tim Hortons Inc.
BOSTON -- 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
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 Canadaand 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
earningsgrowth 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.
Daniel S. Farb Peter R.O. Fleiss
Managing Director Managing Director
Cc: Ms. Cynthia J. Devine
Mr. Scott Bonikowsky
Kekst and Company
Molly Morse / Andrea Calise
212-521-4826 / 212-521-4845
firstname.lastname@example.org / email@example.com
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