Tim Hortons plans to return $475 million to shareholders

TORONTO — Tim Hortons Inc. (TSX:THI) shares rose to their highest peak in more than two years after the company said it’s exploring options to return to shareholders nearly half a billion dollars from the sale of its stake in a southwestern Ontario joint venture bakery.

TORONTO — Tim Hortons Inc. (TSX:THI) shares rose to their highest peak in more than two years after the company said it’s exploring options to return to shareholders nearly half a billion dollars from the sale of its stake in a southwestern Ontario joint venture bakery.

Tim Hortons announced Thursday morning it is selling its 50 per cent interest in Maidstone Bakeries of Brantford, Ont. to joint venture partner Aryzta AG for $475 million after the Swiss company invoked a contract provision forcing Tims to buy or sell the stake.

The iconic fast food company, headquartered in Oakville, Ont., will return the $475 million that it will receive from the sale to shareholders, though the company is not yet sure how, its CFO Cynthia Devine said in an interview Thursday.

“We really just finalized it with our partners yesterday… and we’ll review various alternatives to return value to our shareholders,” she said.

President and chief executive Don Schroeder said the decision to sell the stake came after realizing the bakery was of “much greater economic value” to Aryzta, which provides specialty baked goods to restaurants around the world.

“Because of the international nature of this relationship, the value that we put on the facility was greatly different than what our partner Aryzta was able to put on it,” he said.

Brian Yarbrough, a retail analyst at Edward Jones said the company will likely do a share buyback, raise its general dividend, or issue a special dividend.

“That’s a pretty big announcement because if they buy back a bunch of stock that’s accretive, if they pay a big one time shareholder dividend, that’s nice for shareholders,” he said.

Tim Hortons shares rose steadily to close up six per cent, or $2.19, to $37.63 Thursday on the Toronto Stock Exchange. That was the highest the stock has closed at since December 2007.

Devine noted that the company is flush with cash and doesn’t need to use money from the Maidstone sale to fund planned international expansion.

The company has said it would publicly announce its next steps in the second half of this year after updating its board of directors on the strategy in June. Those discussions will continue at a meeting in November, Schroeder said.

“Because the playing field is littered with companies that rushed in and did the wrong thing, we are taking our time we’re doing the appropriate research, so that when we finally make a decision in any regard it will be the right one,” he said.

Schroeder noted that Tims still has supply agreements for donuts and Timbits to be produced at the Brantford, Ont., bakery until at least early 2016.

“Given the fact that we have an extremely good supply agreement that was negotiated a number of years ago that clearly provides appropriate protection for our store owners in terms of pricing and source of quality supply,” Schroeder said.

He added that nothing will change operationally at the facility, where employees have been “virtually part of the Tim Hortons family,” since the facility opened in 2002.

“We see no reason why we won’t be able to work with them in the same way for years to come.”

Maidstone currently operates at only 55 per cent of its capacity as Tim Hortons is its sole customer. But Aryzta said Thursday it is looking to expand capacity at the bakery and pursue agreements with other restaurants.

“Arytza will be in a position to market Maidstone’s spare capacity across all its customer channels …This increased capacity utilization will unlock value for Aryzta from its investments in Maidstone,” it said in a statement.

There is a slight chance supply chain or quality control could arise when the agreement expires in five years, especially if there is another client at the bakery, Yarbrough said.

“The issue becomes in 2016, 2017 what if they say ’ we have a customer who could take all our capacity and instead of producing two, we want to produce one line, and that would make us more efficient’ and they say ’we no longer want to supply Tim Hortons’.”

Meanwhile, Tim Hortons reported Thursday a 21 per cent rise in second-quarter profit to $94.1 million, or 54 cents per share, up from $77.8 million, or 43 cents, a year ago. Revenues increased 5.7 per cent to $639.9 million in the quarter.

It declared a dividend of 13 cents per share.

Analysts expected the company to report net income of $88.24 million, or 50.5 cents, per share on revenue of $598.94 million, according to Thompson-Reuters.

Robert Cavallo, an analyst with Mackie Research Capital, said new menu introductions and promotions in the quarter helped drive sales growth and predicted stock prices would move higher as investors digest the positive results and the Maidstone sale.

Canadian sale-store sales — a key industry barometer — were up 6.4 per cent in the quarter compared to last year, while growth was somewhat slower in the U.S., up 3.1 per cent.

“We had a lot of good things happening in the quarter — the relaunch of our sandwich program with a new bread was a great addition, the cafe mocha, our emphasis on what cold beverages mean to our system,” Schroeder said.

He added that the strength of same-store sales in the U.S. was also gratifying given the challenging economic conditions.

The company announced it will broaden its initial 2010 plans for up to 60 co-branded Cold Stone Creamery locations and will add the ice cream parlour to another 20 to 25 Tim Hortons stores.

Tim Hortons already operates 63 co-branded locations in Canada and 70 in the U.S.

Tim Hortons has about 500 stores in the U.S. and has announced plans to open an additional 300 stores there by 2013. It has over 3,000 Canadian locations under its banner.