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NEW YORK (Reuters) - Canadian coffee-and-doughnut chain Tim Hortons Inc THI.TO is under pressure from one of its top investors to boost profitability through moves like buying back shares with borrowed money or paring back in the United States, according to documents seen by Reuters and two sources familiar with the matter on Tuesday.
Hedge fund Highfields Capital, which owns about 1.5 percent of the company, wants Tim Hortons to borrow $3.4 billion to buy back more than one-third of its outstanding shares at $59 apiece, the documents show.
The investor also wants Tim Hortons to spin off or sell its distribution business and create a real estate investment trust (REIT) to house its real estate assets, according to the documents. Highfields told the company to "upgrade" its board with new directors who have more financial experience.
The documents include correspondence between Tim Hortons and Highfields executives since March and a Highfields presentation to the restaurant chain.
According to one letter, Tim Hortons Chief Executive Paul House told Highfields managing directors Daniel Farb and Peter Fleiss at a March 8 meeting that implementing a new strategy would have to wait until a new CEO took over, and that some aspects of their plan, such as the REIT, were not workable.
The Highfields executives told House in that letter that his responses were "disappointing" and "not satisfying."
"We came away concerned that the company and its board lack both understanding and a sense of urgency," Farb and Fleiss said.
Tim Hortons has a market value of $8.3 billion, based on Tuesday's closing share price. It is working with Citigroup Inc (C.N) and RBC Capital Markets as strategic advisers, the documents show.
A spokeswoman for Highfields declined to comment on the matter, except to note that the firm did not provide a copy of the documents to Reuters. Tim Hortons did not immediately respond to requests for comment. RBC and Citigroup declined to comment.
Boston-based Highfields Capital, which manages over $11 billion, acquired 2.4 million shares in Tim Hortons in the fourth quarter of last year, giving it a 1.56 percent stake and making it the chain's tenth-largest investor as of December 31.
Reporting By Lauren Tara LaCapra, Jessica Toonkel and Olivia Oran; Editing by Soyoung Kim and Paritosh Bansal, Gary Hill