UPDATE 2-US hedge fund faces challenge in Tim Hortons shakeup bid

Wed May 1, 2013 5:38pm EDT
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* Activist shareholder pushes for debt-funded share buyback

* Fund wants Tim Hortons to create REIT for property assets

* Fund has raised its stake in the company to around 4 pct

* Shares close 4 percent higher on NYSE and TSX (Adds background, company comment, analyst comment)

By Euan Rocha and Jessica Toonkel

TORONTO/NEW YORK, May 1 (Reuters) - Highfields Capital, a U.S. hedge fund agitating for change at Tim Hortons Inc , may have a hard time convincing institutional investors that the chain that says it sells eight out of every 10 cups of coffee in Canada needs a wake-up call.

The Boston-based activist investor, with an about 4 percent stake in the company, wants Tim Hortons to boost shareholder returns by taking on new debt to buy back its stock.

It is also pushing Tim Hortons to scale back its U.S. expansion and focus more closely on its thriving Canadian business. The fund, which also outlined a second tier list of demands, wants Tims to spin off or sell its distribution business, create a real estate investment trust to house its property assets and bring in new directors with more financial experience.

On Wednesday, Highfields confirmed an earlier exclusive Reuters report about the proposals, and said it currently owns 6.1 million shares of Tim Hortons. The fund said the company is studying its proposals and it looks forward to continuing a dialogue with Tim Hortons.   Continued...