Tim Hortons Inc. (THI), Canada’s largest fast-food chain, had its biggest gain in almost two years after Scout Capital Management LLC bought a 5.5 percent stake in the company.
Tim Hortons rose 4 percent to C$56.05 at 4:28 p.m. in Toronto, the largest one-day gain since Aug. 11, 2011. The shares have risen 15 percent this year.
Scout Capital, the New York-based hedge fund, said in a filing dated June 6 it has “engaged in discussions” with Tim Hortons about its capital structure, spending, share buybacks and compensation. Scout’s stake is worth about C$467 million ($457 million) at today’s share price, making it the second-largest shareholder, according to data compiled by Bloomberg.
The hedge fund makes “concentrated investments in high quality businesses it believes are misunderstood and incorrectly valued by the markets,” the company said in an e-mail today. As of May 2013 it had more than $6 billion of assets under management.
Scout Capital is the second activist investor to take a stake in the Oakville, Ontario-based company. Highfield Capital Management LP took a 4 percent stake in the Canadian coffee and doughnuts chain in May, recommending it use debt to fund “capital return” and halt a push in the U.S.
Tim Hortons has faced criticism from investors after its U.S. expansion yielded poor operating profits last year. U.S. stores brought in $20,000 per shop compared with C$182,000 in Canada, according to Derek Dley, an analyst at Canaccord Genuity Corp.
“The two parties and other investors think the debt levels can be expanded at Tim Hortons,” Kevin Chu, a Toronto-based retail analyst with Accountability Research Corp., said by phone. “If they increase their leverage then there’s a possibility that there can be much larger share buybacks and or maybe raising its dividend further.”
The company does not talk about individual shareholders, Scott Bonikowsky, a spokesman for Tim Hortons, said. It is focused on continuing its track record of creating value and welcomes all feedback, Bonikowsky said in a e-mail.
Tim Hortons is committed to the U.S. market and believes it holds “great potential,” Paul House, acting chief executive officer, said in a May earnings call. Cynthia Devine, chief financial officer, said there may be potential to create value by adding debt which could be used for several purposes including “potential share repurchases.”
Marc Caira, a former executive with Nestle SA (NESN) takes over as CEO in July.
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