UPDATE 2-U.S. hedge fund Scout steps up pressure on Tim Hortons

Tue Jun 25, 2013 4:26pm EDT
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* Scout Capital urges Tims to raise debt, buy back shares

* Analysts, investors see room for Tims to take on some debt

* Tims shares rise 3.6 percent on the Toronto Stock Exchange (Adds comment from Tims, details on demands, analyst comment)

By Euan Rocha and Solarina Ho

TORONTO, June 25 (Reuters) - Scout Capital Management, a U.S. hedge fund, said on Tuesday it is urging Canadian coffee and doughnut chain Tim Hortons to increase its debt levels in order to fund a share buyback, measures that Scout say should help drive up Tim Horton's share price by as much as 100 percent from current levels.

The demands to Tim Hortons' board by New York-based Scout Capital are similar those put forward by rival U.S. hedge fund Highfields Capital earlier this year.

In a letter to the board on Tuesday, Scout, which has a 5.5 percent stake in the company, said the measures would allow Tims - as the company's patrons affectionately call it - to dramatically improve shareholder returns.

"I think certainly there is room for Tim Hortons to take on more leverage," said R.J. Hottovy, an analyst at Morningstar. "For a name like Tim Hortons, which does have a pretty robust revenue stream in terms of franchisee rents and royalties, I think that does make a lot of sense."

Scout Capital said it believed Tims could double its free cash flow to C$4.50 per share by 2015 and push its stock price into the C$90 to C$112 range. The shares closed up 3.2 percent to C$56.29 on the Toronto Stock Exchange.   Continued...