TORONTO: Tim Hortons has named a long-time Nestle executive as its new chief, a job that will be no easy task given drooping demand at the Canadian coffee and doughnut chain and a push by a US hedge fund for better returns.
Shares of Tim Hortons, which boasts that it sells eight of every 10 cups of coffee sold in Canada, fell more than 2.5 per cent after the company posted its first decline in established store sales since its 2006 initial public offering.
The company, under pressure from hedge fund Highfields Capital to boost shareholder returns, said it is considering the Boston-based fund’s key demands. But any change will await its new CEO, Nestle veteran Marc Caira, a 59-year-old Canadian.
Highfields wants the chain to take on new debt to buy back shares and believes that Tim Hortons’ US returns do not justify further investment there.
It also wants the company to enter into less capital-intensive franchise deals in the United States or scrap its US expansion plans, according to documents seen by Reuters. Interim CEO Paul House said Tims won’t pull back from the US market, but is studying a plan to work with well-funded franchisees who could operate multiple locations there.
The chain also announced a franchise deal with Apparel FZCO to open as many as 100 restaurants in Saudi Arabia in the next five years. That follows a deal with Apparel to open up to 120 locations in several Arab states, including Qatar and Kuwait.
“These are the type of deals they should be doing -these royalty deals, where they don’t take on any of the risk and get all the reward,” said Barry Schwartz, a portfolio manager at Baskin Financial, which owns about 130,000 Tim Hortons shares. “This is the type of structure they should follow in the US”
Tim Hortons said it will also consider taking on additional debt and study what would be its “optimal” capital structure considering historically low interest rates. Increased debt could affect its tax rate and investment grade credit rating, it warned.
But executives said they had already considered and rejected a Highfields proposal to create a real estate investment trust to house Tim Hortons property assets because it would not create significant value.