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By Robert Thompson
Financial Post Business
March 2006 Issue
Tim Hortons is one of Canada's great growth stories. To be a great stock it will have to keep up the pace.
It's a typical mid-winter morning at Gary O'Neill's Tim Hortons restaurant on Mountain Road in Moncton, N.B. Outside, the snow is falling, and the cars are lined up at the drive-thru as people stop by to pick up their morning coffee on the way to work. Indoors, the regulars are clustered around the tables, chatting over their doughnuts and double-doubles. One of them, a middle-aged man, notices O'Neill behind the counter and calls out a greeting. On this morning, however, he offers more than the typical salutation. "In March," the man announces, "I'm going to own part of this store!"
Adrian Mastracci, investment counsel at Vancouver’s ‘fee-only’ KCM Wealth Management, says, "There's going to be an emotional attachment to this one, even if investors don't really know a lot about how Tim Hortons functions.”
O'Neill laughs. As one of Tim Hortons' largest and most successful franchisees -- he opened his first Tim's franchise here more than 30 years ago and today owns 40 restaurants across Canada and in the United States -- he's heard that comment a lot in recent weeks. Everybody, it seems, is angling to get a piece of Canada's coffee-and-doughnut king when it goes public later this month or in early April in what's likely to be this country's investing event of the year. "There's a lot of talk about the IPO from everyone I run into. Everyone has something to say about it," O'Neill says. "My customers are all asking where they can buy shares."
That interest is hardly surprising. With RRSP earnings swollen from the boom in energy and commodity prices, Canada's Main Street investors no doubt feel fat and confident these days. And who among them wouldn't want a bit of Tim's? With more than 2,800 outlets in Canada and the U.S. -- generating revenue of US$1.2 billion for its corporate parent, Wendy's International, in 2005 -- the chain is one of this country's most exciting growth stories. It may not be as high-flying as, say, Waterloo's Research In Motion. Then again, no one's got a patent on the doughnut.
The value of Tim Hortons -- or at least the perception of value -- lies in more than its network of restaurants and drive-thrus linking communities from Whitehorse to Conception Bay. More important is Tim's place on the cultural landscape; its ties to the national pastime, its mythic back story and its resoundingly folksy brand. In this country, Tim Hortons is more than a fast-food chain. It's an institution that satisfies Canadians' appetite for national identity as much as their taste for hot coffee with milk and sugar. For that reason, an investment will be more than a business move. To many, it will also be an act of patriotism. "There's going to be an emotional attachment to this one, even if investors don't really know a lot about how Tim Hortons functions," notes Adrian Mastracci, president of KCM Wealth Management in Vancouver. "Some people are going to buy this just because it's Tim's."
And that may be a problem -- especially for investors who think they understand the business because they see the morning coffee lineups. While no one questions Tim's phenomenal success, its best years as a growth company may be over. Analysts warn that it may be reaching the saturation point in Canada, and that the brand hasn't made major inroads in the U.S.-- its largest potential market -- since opening its first American franchise in 1985. The question today "is whether historical growth indicates future growth," says Peter Holden, an analyst with Veritas Investment Research in Toronto. "Canada, if not tapped out, is pretty full. And while their marketing in Canada has been great, I don't know how well it's going to translate into the U.S."
This doesn't mean the Tim's IPO is going to be a bust. Far from it. But investors should think carefully before shelling out. Even Ron Joyce, the ex-cop and early Tim's partner who created its business model, is steering clear of the IPO. Demand, he says, means shares will likely be fully valued when they hit the market, leaving little room for profit.
Tim Hortons resonates with Canadians thanks, in part, to its down-home branding and marketing. The restaurants are active at the grassroots level in their support of community sports and recreation programs, a tribute to company founder and namesake Tim Horton, a star defenceman for the Toronto Maple Leafs who was killed in a car accident in 1974. Nationally, the chain promotes itself as a friendly neighbour with advertising campaigns featuring customers, such as Lillian, the gentle grandmother from Lunenberg, N.S., who walks up a hill every day, rain or shine, to visit her local Tim's outlet and get her coffee fix.
Business at Tim's may have been almost that folksy in the mid-1960s, when Horton and Joyce were plotting how to break their little coffee chain out of its original Hamilton neighbourhood. But it had become a serious regional outfit with 40 franchises by the time of Horton's death. And it was big business when Joyce, who bought Horton's share of the firm after his death, sold to Wendy's in 1996 in a share-based deal valued at $600 million.
The company that Joyce sold to Wendy's, called TDL Group Corp., bears little resemblance to the restaurants Canadians have grown accustomed to seeing on their street corners and TV screens. It is, in fact, a holding company that handles the franchising, wholesaling, marketing and real estate business that lies behind the network of independently owned franchise restaurants. But if the heart of the brand lies in those restaurants, the money's been in TDL. And so, it wasn't long after the sale that it became Wendy's chief profit driver. Joyce continued to work for TDL under Wendy's, and over the next 10 years, he and chief operating officer Paul House put the company through a massive expansion. They more than doubled the number of franchises and, in 1998, moved into the lunch business with soups, sandwiches and chili.
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