Tim Hortons Faces Another Activist Hedge Fund, REIT Conversion Could Be Next

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Scout Capital Management filed a 13D disclosing an 8.4 million share (5.5% of the total outstanding) position in Tim Hortons Inc (NYSE:THI) (TSE:THI). The filing discloses that Scout has engaged and expects to continue to engage in discussions with management about optimal capital structure, share repurchases, management compensation, technology investments and other matters.

Tim Hortons Faces Another Activist Hedge Fund, REIT Conversion Could Be Next

Scout’s investment follows prior disclosure that activist investor Highfields Capital had bought a 4% stake in Tim Hortons Inc (NYSE:THI) (TSE:THI). Highfields has proposed a significant leveraging of THI’s balance sheet, a curtailing or cessation of investment in the struggling U.S. business, the exploration of a REIT, and other actions.

Tim Hortons Inc (NYSE:THI) (TSE:THI) Changes are being actively considered

Tim Hortons management has separately disclosed that it is actively exploring its capital structure and also actively reviewing the capital intensity of its U.S. business. Many view the active consideration of change favorably.

THI’s valuation significantly trails that of other 100% franchised business models and more active balance sheet management could, partially close that valuation gap. THI’s comments about taking on more debt are tempered by a goal of retaining an investment grade debt rating. THI also cautions about the potential tax consequences of taking on debt because of a complicated cross-border corporate structure.

Tim Hortons Inc (NYSE:THI) (TSE:THI) New CEO arrives in early July

Marc Caira was recently named CEO of Tim Hortons effective July 2nd, resolving a two-year effort to fill the position.

BAML analysts like the numerous aspects of change at Tim Hortons including a new CEO, a willingness to take on more debt, a re-examination of the capital intensity of the U.S. business, and new product and service programs to improve sales against easier comparisons. The latter includes new products and drive-thru modifications.

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