By Craig Maddock, CFP, FCSI, CIM, FICB, CFA, MBA
Vice President, Investment Management
If there’s one thing you can count on in Canada, it’s that you’ll find a Tim Hortons pretty much anywhere you go. This quintessentially Canadian experience is even part of our lingo—just mention “roll up the rim to win”—and most Canadians will know what you’re talking about.
So I read with interest this week’s announcement that Tim Hortons’ parent company, Restaurant Brands International (RBI), is buying U.S. fast-food chain Popeyes Louisiana Chicken for $1.8 billion.
A marriage of coffee and fried chicken isn’t as strange as you might think. Fast-food companies Wendy’s, Cold Stone Creamery and Burger King have all also been a part of Tim Hortons’ past and present.
Acquiring Popeyes makes sense for RBI’s business model
The Popeyes acquisition comes at a time when RBI is in growth mode and looking to reinvest the substantial free cash flow its business generates. RBI has a very interesting business model, having transformed from a corporate-owned concentration to a focus on franchises. It is essentially a royalty business whereby RBI charges Tim Hortons and Burger King franchisees a flat fee, or a percentage of revenues, shifting the business risk directly to the franchisees.
Popeyes currently has 2,600 mostly U.S. locations, and like Tim Hortons and Burger King, is almost entirely franchise based, providing RBI with the potential to capitalize on further strong margins and cash flows. With Popeyes, RBI now has an international expansion opportunity that may include cost-cutting and operational changes along the lines of what they’ve done recently with Tim Hortons and Burger King.
RBI CEO Daniel Schwartz also sees expansion of the Tim Hortons and Burger King chain brands south of the border as one of the firm’s biggest opportunities, and the company has already started the process to bring Tim Hortons to the Philippines, Great Britain and Mexico.
The evolution of Tim Hortons has been a success story for shareholders...
We’ve seen Tim Hortons transform from simply coffee and donuts to a higher-end quality food experience that continues to expand in Canada and globally.
I remember going up to the Tim Hortons counter as a kid and placing my donut order for the first time on my own. But my daughter now enjoys a much wider (and healthier) variety of menu options at her weekly Tims lunch with her grandmother.
While changes like this haven’t always made the customer happy (whatever happened to sour cream glazed donuts?), they’ve certainly pleased shareholders.
At MD, RBI is our largest overweight in the PIM Canadian Equity Pool, relative to the S&P/TSX Composite Index, and we also hold smaller positions in RBI in both MD Select Fund and MD Equity Fund. As of February 23, the stock has returned 62%, over a 12-month period.1
… and we see the potential for RBI to grow through future acquisitions
Franklin Bissett Investment Management, one of our advisors for Canadian equities, is very positive on RBI. Jayson Moss, research analyst with Franklin Bissett, says that RBI’s fully franchised structure is one of the strongest business models out there. “I can’t think of another business that has such a strong free cash profile and growth trajectory as RBI, in particular with its existing brands Burger King and Tim Hortons, and soon Popeyes. We plan to remain fully invested, and see a lot more opportunity for RBI to grow the business creatively through acquisition in the future.”
At this point, we see RBI and its acquisition of Popeyes as a positive development with a great deal of potential upside.
With Timbits, burgers and now fried chicken on the menu, how about a side of spinach?