Long term holders of Tim Hortons have now, counting dividends, about quadrupled their money.
Now that’s a double-double we can all love. So it is with regret that we have sold our holdings in this long-held core position. Here are our reasons:
1. The price is very attractive. We thought the stock was expensive in the $65 range. Getting over $87 is a gift horse. Sometimes you just have to take the money and run.
2. We are value investors. The new company which will own Tim Hortons and Burger King will not, in our view, be a value play. It will have very high debt, numerous execution challenges, and it looks like a price-to-earnings ratio of at least 25. Not our cup of tea (or coffee).
3. We like a company that returns funds to shareholders by dividends and share buybacks. Newco will have massive debt to repay and those expensive (9%) Warren Buffet preferred shares to service. We don’t expect to see dividends for a few years.
4. Starting out with governments in two countries mad at you seems like a bad idea. It is not clear if the US will try and block the deal or if the net benefit to Canada test will be met. If the transaction is blocked, the current share premium will go away.
We will look at newco if and when the deal is done, and might choose to go back in. Right now, the balance of reward to risk comes down on the sell side, so that’s what we have done.