Go to the Globe and Mail homepage

Jump to main navigationJump to main content

Business Briefing

Tim Hortons shares climb as activist hedge fund demands change Add to ...

These are stories Report on Business is following Wednesday, May 1, 2013.

Follow Michael Babad and the Globe’s top business stories on Twitter.

Shareholder pressures Tims
Shares of Tim Hortons Inc. climbed today as the doughnut and coffee king comes under attack from an activist hedge fund holding some 4 per cent of its stock.

Highfields Capital, which holds more than 6 million shares, is pushing Tims to hold the line on its U.S. operations, rather than expand them, and boost profitability through other means, as well.

Highfields said in a statement it met with the company in March, and then wrote to executives.

"The letter noted that Tim Hortons is a world-class company, with extraordinary brand recognition and great growth opportunities in Canada," Highfields said in a statement that included a copy of the letter.

"It also outlined two primary recommendations, both designed to improve operating performance and the company’s capital structure, in order to create value for the benefit of all shareholders," the hedge fund added.

"They include discontinuing capital investment in the company’s U.S. expansion strategy (which has not been successful) and a recapitalization to take advantage of low interest rates and materially increase returns on equity and earnings per share growth.  The letter also alluded to other levers that potentially could lead to value creation, but such measures are not the primary focus."

The letter showed Highfields also would like to see the chain's real estate holdings at least partially converted to a real estate investment trust.

Tim Hortons shares, it added, could "approach or exceed" $100 within a year to 18 months by following its advice.

"We are focused on continuing our track record of creating shareholder value and always welcome constructive dialogue with our shareholders,” said a Tim Hortons spokesman.

“We don’t comment on specific conversations.”

The chain reports first-quarter results next Wednesday.

In an earnings preview today, Raymond James held its rating on Tim Hortons at “market perform” and its price target at $50 (Canadian), projecting first-quarter revenue will come in 3.8 per cent higher at $748.6-million, with growth in same store sales, the key measure in retailing, up 1.5 per cent in Canada and 2.8 per cent in the U.S.

Analysts expect earnings per share of about 62 cents in the quarter.

“While we believe that an elevated competitive (and promotional) intensity in the coffee business is the new normal (as each point of share in the breakfast day part is in our opinion ever more fiercely contested), we are surprised by how pervasive (and at times borderline irrational) the promotional environment was in [the first quarter],” said Raymond James analyst Kenric Tyghe.

“The combination of challenging weather conditions, tough year-ago comps, and a more price sensitive consumer (driving elevated promotional activity), we believe contributed to nominal pricing in the system and weak industry traffic,” he added in a research note.

“We do believe that improved mix at Tim Hortons will provide a tailwind in the [first-quarter] average ticket (largely on our expectations of increased panini, specialty coffee and single serve traction).”

Facebook, by the numbers
Facebook today posted stronger profit and revenue, and, notably, a 54-per-cent increase in mobile users.

The social network’s first-quarter profit climbed to $219-million (U.S.) or 9 cents a share from $205-million, also 9 cents, a year earlier.

Revenue rose to almost $1.5-billion from $1.1-billion.

The number of average daily active users increased in March by 26 per cent, to 665 million, while monthly users rose by 23 per cent to 1.1 billion.

Facebook, moving more to mobile devices, said the number of mobile monthly active users hit 751 million by March 31.

Mobile advertising revenue climbed in the quarter to 30 per cent of the total, up from 24 per cent in the final three months of last year.

“We’ve made a lot of progress in the first few months of the  year,” said founder and chief executive officer Mark Zuckerberg.

Fed stays course
The Federal Reserve stayed the course today, saying the economy has been expanding “at a moderate pace” and keeping in place its near-term goal for unemployment.

However, it added it could expand or slow its bond-buying program, a change from earlier signals that suggested the program could soon end.

“Labour market conditions have shown some improvement in recent months, on balance, but the unemployment rate remains elevated,” the central bank’s policy-setting Federal Open Market Committee said.

“Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy is restraining economic growth.”

It again pledged the hold its benchmark federal funds rate at its record low near zero until the unemployment rate falls to at least 6.5 per cent.

“With fiscal headwinds providing a drag on growth in the near term, it would have been a shock if the Fed had introduced any hints of changing its current very accommodative policy stance,” said assistant chief economist Dawn Desjardins of Royal Bank of Canada.

“Looking ahead, even the expected acceleration in activity in the second half of this year and in 2014 is unlikely to result in the unemployment rate moving the Fed’s 6.5-per-cent threshold meaning that any tightening in policy over this period will come from a pulling back in the nontraditional measures rather than an increase in the target for the Fed funds rate.”

Sabia on Barrick
Michael Sabia says he’d oppose an $11.9-million pay package even if it were for Jesus.

The well-known Canadian business executive - and practising Catholic - was referring today to the controversial signing bonus paid to John Thorton to join Barrick Gold Corp. as co-chairman.

That bonus, part of a bigger package, has raised the ire of shareholders, including the Caisse de dépôt et placement du Québec, the giant pension fund manager headed by Mr. Sabia.

The Caisse and six other big pension funds opposed Barrick’s compensation plan at the gold miner’s annual meeting late last month, as shareholders voted 85.2 per cent against it.

That came in the face of spiralling costs at a key project, and a slumping share price.

 “If Jesus Christ himself had been appointed co-chairman of the board and was offered that package we would have voted against it,” Mr. Sabia, who earns about $1-million a year at the Caisse, told Business News Network during a conference in Los Angeles.

“And I say that as a Catholic who goes to church.”

Barrick’s annual say-on-pay vote isn’t binding, and the company has said only that it will study the results, though it takes shareholder issues seriously.

“I guess we’ll find out whether the Barrick board is tone deaf or whether or not they are going to listen to the voice of the people who own that company,” said Mr. Sabia, also the former chief executive of BCE Inc.

Loblaw profit climbs
Loblaw Cos. Ltd. posted first-quarter profit and revenue gains today, heralding a strategy the grocer said is “delivering results.”

Loblaw profit climbed to $171-million or 61 cents a share from $122-million or 43 cents, helped by a gain from changes to its pension plan, while revenue increased to $7.2-billion from $6.9-billion.

“The first quarter showed continued evidence of momentum in our core business,” said executive chairman Galen Weston.

“Greater assortment and an improved in-store experience are resonating with customers, translating into same-store sales growth and positive trends in tonnage and market share. These trends were seen across the country and across our banners.”

Loblaw also boosted its quarterly dividend by 9.1 per cent, to 24 cents, and said its plan for a $7-billion real estate investment trust is on track for early to mid-July.

Talisman posts loss
Canada’s Talisman Energy Inc. fell to a loss in the first quarter, hurt by flat natural gas production levels and impacted by the sale of a 49-per-cent stake of its North Sea operations.

Talisman lost $213-million (U.S.) or 21 cents a share, compared to a profit of $291-million or 28 cents a year earlier, The Globe and Mail’s Bertrand Marotte reports.

“We are taking steps to exit a number of non-core countries, and actively working to unlock $2-3-billion in net asset value through sales or joint ventures,” said chief executive officer Hal Kvisle.

“Our first priority is to live within our means, allocating capital to our best opportunities in the Americas and Asia-Pacific,” he added in a statement.

Bank sees no housing collapse
Canada’s housing market remains a concern, but doomsayers fearing a crash are in for a “pleasant surprise,” Bank of Nova Scotia says in a new forecast.

“We expect a GDP negative contraction in housing but not a collapse as interest rates are expected to remain low and immigration trends supportive,” currency strategists Camilla Sutton and Eric Theoret said.

“This should prove a pleasant surprise compared to what some have feared.”

Canada’s housing market has been cooling since last summer, after a fourth round of mortgage restrictions from Finance Minister Jim Flaherty. Sales have plunged, but prices have generally held up.

The provinces most affected are British Columbia and Ontario, home to Vancouver and Toronto, the two cities of concern, as well as Quebec.

Last  year, Scotiabank economists said in a separate forecast, the construction and real estate brokerage sectors helped pump up those provincial economists. Not so for 2013.

“This year, the housing sector is expected to dampen output and employment growth,” they said.

“Increased manufacturing production should pick up some of the slack, centred in aerospace in Quebec, wood products in British Columbia and, to a lesser extent, motor vehicles in Ontario.”

Scotiabank projects housing starts of 175,000 this year and 170,000 in 2014, down from the 200,000 or more of the past two years, which many observers have said were unsustainable levels given household formation.

By most accounts, Mr. Flaherty and Bank of Canada Governor Mark Carney, who had gone so far as to warn of a possible interest rate hike if borrowers did not get their act in gear, appear to have succeeded in engineering a soft landing in the housing market.

The crucial measure of household debt to disposable income remains high, but is expected to stabilize around its record level of 165 per cent, according to the Bank of Canada.

And borrowing has slowed noticeable.

According to the latest reading by Royal Bank of Canada, household credit climbed in March by 4.4 per cent from a year earlier. That’s the same pace as a month earlier and well below the 5.6-per-cent rate of a  year earlier.

Looking at the first quarter as a whole, said RBC economist David Onyett-Jeffries, growth in mortgage debt was the slowest, on a year-over-year basis, since late 2001.

Non-mortgage debt rose at the slowest pace since late 1993.

Streetwise (for subscribers)

Economy Lab

ROB Insight (for subscribers)

Business ticker

Follow on Twitter: @michaelbabad

In the know

Most popular video »

Highlights

More from The Globe and Mail

Most Popular Stories