Fast-food chain Wendy's International Inc. plans a fast sale of its Tim Hortons chain, with ownership of the iconic coffee shops to be handed out to Wendy's shareholders in a special stock dividend soon after Tim Hortons' scheduled initial public offering in March.
Wendy's, under pressure from shareholders to serve up better results, adopted the more aggressive, tax-efficient approach to the spinoff of Tim Hortons at a board meeting last week.
Wendy's will first sell up to 18 per cent of Tim Hortons in an IPO that is expected to put up to $600-million (U.S.) in the company's till. Shortly after that debut, Wendy's plans to give its shareholders new stock that represents the remaining 82-per-cent stake in Tim Hortons, according to investment bankers working with the Dublin, Ohio-based burger chain.
Many of Wendy's major shareholders are hedge funds and are expected to quickly sell their Tim's shares into the market.
"The process is structured so there is no tax hit for the company," said one investment banker. "You saw much the same sort of restructuring take place when [Canadian Pacific] was split up, or when BCE spun out its stake in Nortel."
On Friday, Wendy's chairman and chief executive officer Jack Schuessler hinted at the change in plans in a press release.
"We are committed to a seamless transition for Tim Hortons to become a standalone company, while preserving a tax-efficient transaction for Wendy's shareholders," Mr. Schuessler said in the release.
When Wendy's first announced plans to sell its Oakville, Ont.-based Tim Hortons unit in September, the company estimated the process could take up to two years.
Now, the whole transaction is expected to play out in as little as nine months.
"Wendy's is going to use the strong Canadian demand for Tim Hortons shares to get a premium valuation on the IPO, then spin out the rest of the company as quickly as possible," said one Canadian financer working on the deal.
He added: "Wendy's will take money off the table to help on its own turnaround, then hand out the rest of the company without triggering any taxes."
Wendy's, which had been plagued by a weak stock price prior to announcing this restructuring, faced calls in mid-December from billionaire U.S. investor Nelson Peltz's Trian Group to spin off all of Tim Hortons, sell other brands, and cut costs. Last year, hedge fund Pershing Square Capital Management LP bought a stake in the chain and began campaigning for a Tim Hortons IPO. The stock rose when the IPO was announced.
The coming deals will end a relationship that began in 1995, when Wendy's bought Tim Hortons from co-founder Ron Joyce for $580-million (Canadian). The planned IPO would value the entire coffee chain at $4-billion (U.S.). Yesterday, Wendy's had a total market capitalization of $6.6-billion.
Tim Hortons commands a premium valuation because the company's mix of double-double coffees and crullers has posted impressive sales growth on both sides of the border. Same-store sales were up 5.8 per cent in Canada and 6.7 per cent in the U.S. during the last three months of 2005.
In contrast, Wendy's fourth-quarter U.S. same-store sales, or sales at stores open at least a year, fell 2.9 per cent at company-owned outlets and were off 1.9 per cent at franchises, the chain's fifth successive quarter of declining sales. In a recent filing with the U.S. Securities and Exchange Commission, Tim Hortons outlined its dominance of the Canadian marketplace, saying that it represents 74 per cent of the coffee and baked goods sales in the quick-service sector.
Tim Hortons stock is expected to start trading in March on the Toronto and New York stock exchanges, under the symbol THI. Investment banks RBC Dominion Securities Inc. and Goldman Sachs & Co. are leading the Tim Hortons IPO.
Tim Hortons earned $157.5-million in profit in 2004, or roughly $1.36 a share, according to research conducted by analyst Larry Miller of Prudential Equity Group LLC. In a note last month, Mr. Miller suggested that with a $600-million IPO, Tim Hortons shares could be worth between $29 and $36 apiece, with individual Canadian investors stepping up to the counter for stock. "It's a Canadian demand story," Mr. Miller said. "Retail-wise, it's going to be zero in the U.S."
© The Globe and Mail
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