Franchisee spat hurting Tims sales, Ackman says
Friday, November 17, 2017 – Print Edition, Page B1

Prominent shareholder activist and investor Bill Ackman has called out Tim Hortons' public spat with its franchisees as a factor in "softness" at the café chain's business, underlining the impact of a revolt by a growing number of restaurant owners.

Tim Hortons' battle with its franchisees has helped push down its sales over recent quarters along with a cool early response to its new espresso-based coffee and lunch offerings, says Mr. Ackman, founder of New York hedge fund Pershing Square Capital Management LP and an investor in Restaurant Brands International Inc., which is the parent of Tim Hortons. "We believe sales in recent quarters have also been negatively impacted by the recent public dispute with a group of franchisees," Mr. Ackman says in a letter on Wednesday to shareholders.

Mr. Ackman's Pershing Square this week cut its share stake in RBI by 32.3 per cent to 26.5 million shares, according to a Reuters report, pointing to a U.S. Securities Exchange Commission filing. (The change in holdings was as of Sept. 30, 2017, and compared with the previous quarter ended as of June 30, 2017.)

On Thursday, RBI's stock rebounded to close up almost 3 per cent to $65.17 (U.S.) on the New York Stock Exchange after having fallen 2.16 per cent the previous day, when Mr. Ackman's letter was released.

RBI, controlled by the Brazilian private-equity firm 3G Capital, has been grappling with a growing wave of discontent among some Tim Hortons franchisees, who say the parent company is squeezing them by pushing up their costs, while the chain faces steeper minimum wages in Ontario and Alberta and possibly elsewhere.

In March, The Globe and Mail revealed that the franchisees had formed the Great White North Franchisee Association to fight RBI and what they consider its strong-arm tactics to slash costs at the expense of the restaurant owners.

RBI is also facing two attempts by Canadian Tim Hortons franchisees to seek class-action status to sue the company, alleging it is pinching their profits and interfering with their right to organize.

Mr. Ackman says in his letter that Tim Hortons management has tried to improve relationships with Tim Hortons franchisees by reducing the price the company charges its restaurant owners for their supplies, which has increased corporate costs.

"While these items depressed earnings in the current quarter, they represent an investment in improving relationships with Tim Hortons franchisees," Mr. Ackman says.

Despite softness at Tim Hortons, parent RBI, which also owns the Burger King and Popeyes Louisiana Kitchen chains, last month posted a third-quarter profit that beat analysts' expectations, driven by higher sales at Burger King.

However at Tim Hortons, which RBI acquired in late 2014, sales at its restaurants open a year or more were relatively flat, rising just 0.3 per cent. Those sales are considered an important industry measure.

Earnings before interest, tax, depreciation and amortization (EBITDA) dropped 1 per cent at Tim Hortons while increasing 16 per cent at Burger King and 40 per cent at Popeyes, resulting in an overall 8-per-cent EBITDA gain.

"The slight decline at Tim Hortons was due primarily to a price reduction on supplies sold to its franchisees and an increase in costs," Mr. Ackman says. Those initiatives were aimed at appeasing franchisees but hurt the bottom line, he says.

Still, he says RBI's franchised business model is a "high-quality, capital-light, growing annuity that generates high-margin brand royalty fees from its three brands. ... The company has an extremely capable management team, is backed by an owner-oriented sponsor (3G), and has a large unit growth opportunity that requires virtually no incremental capital.

"The company's operating strategy is highly scalable and replicable, which should provide opportunities for additional value-creating acquisitions over time."

On a conference call this week, Pershing investors were told that the best part of the RBI business model is that "it requires almost no capital in order to grow because the franchisees are the ones who make the investments and ultimately run the restaurants."

Restaurant Brands Int'l (QSR-T)

Close: $83.14, up $2.21

Restaurant Brands Int'l (QSR-N)

Close: $65.17 (U.S.), up $1.76

Associated Graphic

Sales at Tim Hortons restaurants open a year or more were flat in the recent quarter.


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