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TORONTO, May 1 (Reuters) - Highfields Capital, a U.S. hedge fund agitating for drastic change at iconic Canadian coffee-and-doughnut chain Tim Hortons Inc, is set for an uphill battle convincing some long-term institutional investors of the merits of its case.
The Boston-based activist investor, which owns a 1.5 percent stake in Tim Hortons, wants the Canadian chain to boost returns aggressively via debt-funded share buybacks, while also scaling back on its U.S. expansion plans.
In addition, it wants Tim Hortons to spin off or sell its distribution business, create a real estate investment trust to house its property assets and bring in new directors who have more financial experience.
The proposals 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 after a public battle. But earlier this year, fertilizer company Agrium Inc fended off an attempt by its biggest shareholder, U.S. hedge fund Jana Partners LLC, to break up the company.
Highfields' demands bear some similarities with those from Jana in its battle with Agrium. Jana wanted Agrium to spin off or sell its retail arm and add directors with more experience in retail to its board.
And, as in the Agrium case, Tim Hortons stock has posted strong gains over the last five years, making it harder for the fund to build a case.
"Canadian Pacific had a tired board with weak management, chronic underperformance and restive shareholders," said David Baskin, president of Baskin Financial in Toronto. "None of that applies to Tim Hortons, which I think is still widely liked by institutional holders."
Baskin Financial owns about 130,000 shares in Tim Hortons, according to Thomson Reuters data.
Tim Hortons' stock is up some 60 percent over the last five years, while the Toronto Stock Exchange's S&P/TSX composite index has fallen roughly 13 percent over the period.
But shares of some of Tim Hortons' U.S. competitors, which also have a presence in Canada, have outpaced those of the Canadian chain, whose red-yellow-brown logo is ubiquitous across Canada.
McDonald's Corp shares have risen about 70 percent over the same period, while those of Starbucks Corp have nearly quadrupled in value.
"Tim's performance has been somewhere between good and very good, given economic conditions in a hyper-competitive sector. So I would guess it will be hard for these guys to get traction but maybe the stock will respond anyway," Baskin said.
"A 1.5 percent position is not going to blow anyone's socks off, but it does say you're kind of serious."
Tim Hortons' shares were up 2.8 percent at $55.68 in trading before the bell in the United States on Wednesday.