Highfields Capital, a U.S. hedge fund wants Tim Hortons Inc. (NYSE:THI) (TSE:THI) to boost shareholder returns by taking on new debt to buy back its stock besides scaling back its U.S. expansion.

Tim Hortons logo Highfields Capital

Highfields Capital Intent

The Boston-based activist investor Highfields Capital wants the coffee shop chain Tim Hortons Inc. (NYSE:THI) (TSE:THI) to spin off or sell its distribution business, create a real estate investment trust to house its property assets and bring in some new directors who have more financial experience.

In light of news reporting in the past 24 hours Highfields Capital Management LP today shared its correspondence with Tim Hortons to avoid any ambiguity.

The letter also noted Tim Hortons Inc. (NYSE:THI) (TSE:THI) is a world-class company, with extraordinary brand recognition and great growth opportunities in Canada.  Tim Hortons claims the chain sells eight out of every 10 cups of coffee in Canada.

The $11 billion value-oriented investment management firm has a track record of bringing about change at other firms. On Wednesday, the hedge fund confirmed an earlier exclusive Reuters report about the proposals, and indicated it currently owns 6.1 million shares of Tim Hortons.

In its letter, Highfields questioned Tim Hortons Inc. (NYSE:THI) (TSE:THI) on its view of capital light approach and capital allocation strategies. Highfields Capital believe a unique opportunity exists for Tim Hortons to create material shareholder value by recapitalizing the company and taking advantage of prevailing historically low interest rates.  The hedge fund feels its proposals would substantially increase returns on equity and EPS growth.

Highfields in its letter further clarified such proposals have been successfully implemented at Dunkin Brands Group Inc (NASDAQ:DNKN) and Domino’s. The hedge fund believes Tim Hortons’ shares could cross $100 within 12-18 months by following its suggestions as the Canadian company’s stable cash flows, revitalized earnings growth and higher returns would result in a material revaluation of the shares.

According to some money managers and investors, the hedge fund’s proposals may not be easy to sell to long-term investors.

The proposals from Highfields represent the latest attempt by a U.S. hedge fund to shake up a Canadian company. Last year, Bill Ackman’s Pershing Square won big change at Canadian Pacific Railway Limited (NYSE:CP) (TSE:CP) after a bitter public battle. Earlier this year, fertilizer company Agrium Inc. (NYSE:AGU) fended off an attempt by its biggest shareholder, U.S. hedge fund Jana Partners LLC, to break up the company and defeated Jana’s slate in a hard fought proxy battle.

Tim Hortons Inc. (NYSE:THI) (TSE:THI)’ shares were up 3.8% at US$56.26 in midday trading on the New York Stock Exchange on Wednesday, while its Toronto-listed shares were up 4% at $56.74.