| Photo: (Bloomberg) |
Scout Capital Management is turning up the heat on Tim Hortons, the coffee and doughnut chain founded by Tim Horton, who played professional hockey for 24 years until his death in a car crash in 1974. Scout, a New York hedge fund firm founded in 1999 by James Crichton and Adam Weiss, filed a detailed updated 13D form with the Securities and Exchange Commission, laying out its case for why its target is undervalued and needs change. Scout owns 5.5 percent of Tim Hortons.
In a letter to the board of directors, the two hedge fund principals assert that the company can double its free cash flow. Based on peer multiples, the stock price could be boosted by 65 to 105 percent. “The benefits of better capital allocation are even more evident when looking at the compounding effects over the next decade, during which period we believe Tim Hortons’ earnings per share and stock price could grow by fivefold,” Crichton and Weiss add in their lengthy letter, which includes charts and graphs.
The cornerstone of their thesis is that Tim Hortons has one of the strongest franchise companies and should be taking better advantage of its competitive position. Scout is urging Tim Hortons to borrow money to buy back shares, a classic short-term activist proposal favored by others over the years, including Carl Icahn and hedge fund firm Jana Partners.
Crichton and Weiss also want the company to continue to grow in the U.S., but not by using the company’s cash flow to fund real estate investment or new-store capital expenditures. Rather, they think the company should get well-capitalized franchisees to do the capital spending.
Scout also proposes a series of metrics to better align management’s interests with those of shareholders. “We strongly urge the board to promptly bring Tim Hortons’ executive compensation framework more in line with the creation of long-term shareholder value and also with best practices as suggested by Glass Lewis and ISS,” it adds, referring to the two most influential institutional shareholder research and advisory firms.
As we recently pointed out, Tim Hortons is one of two stocks for which Scout recently filed its first 13Ds since 2004, the other being DineEquity. These forms are used to file potential activist plans.
On DineEquity, however, Scout seemed to lose a key ally on Tuesday. Richard T. McGuire III’s San Francisco–based Marcato Capital Management disclosed that it had liquidated virtually all of its shares of the company, which owns and operates Applebee’s Neighborhood Grill & Bar and International House of Pancakes.
In its recent filing, Scout says it has had discussions with senior management regarding the company’s optimal capital structure, debt refinancing, timing and magnitude of share repurchases, management compensation metrics, and merger and acquisition strategies, among other matters. It also concedes it does not have a plan or proposal related to these issues.
