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TORONTO, June 18 (Reuters) - Shares of Tim Hortons Inc jumped 3.5 percent on Tuesday, as investors bet that the Canadian coffee and doughnut chain was more likely to make changes that could boost shareholder returns following the emergence of a second activist investor.
The stock climbed C$1.89 to C$55.77 on the Toronto Stock Exchange after low-profile U.S. hedge fund Scout Capital Management disclosed in a filing on Monday that it had a 5.5 percent stake in the company.
Highfields Capital, which held a 4 percent stake in Tim Hortons as of early May, is pushing the company to raise about $3.4 billion in debt, buy back more than one-third of its shares, shed its distribution business and create a real estate investment trust.
Scout said in a filing that it has held talks with management about optimal capital structure, share repurchases, management compensation, technology investments and other matters and its expects plans to continue such discussions.
Outgoing Tim Hortons Chief Executive Paul House told Reuters last month that the company will likely increase its debt and purchase shares, but it was unlikely to do so at a level that Highfields wanted.
Major changes will await new CEO Marc Caira, who takes the helm on July 2.
"We view the active consideration of change favorably," Bank of America Merrill Lynch analyst Joseph Buckley wrote in a note. "Tim Horton's valuation significantly trails that of other 100 percent franchised business models and more active balance sheet management could, in our view, partially close that valuation gap."
The company has tempered such comments with its desire to retain investment grade debt rating and cautions over tax consequences, the analyst added. (Reporting by Susan Taylor; Editing by Marguerita Choy)