Canadian Coffee Brands

Founded in 1964 by then National Hockey League superstar Tim Horton, the coffee and doughnut shop started with one outlet in a blue-collar district of Hamilton.

Three years later, Horton and Ron Joyce, the chain's first franchisee, became business partners. By 1974, the chain had grown gradually to 40 restaurants.

Then Horton died tragically in a car accident returning from a game in Buffalo. His car, an exotic Italian-made Pantera, spun out of control. He was 44.

A year later, Joyce bought out Horton's widow, Lori, a former Ice Capades star, for $1 million and a Cadillac Eldorado.

Joyce, a former Hamilton police officer and high school dropout, became sole owner of Tim Hortons. He launched an aggressive expansion campaign.

By 1995, there were 1,000 Tim Hortons outlets across Canada and the company had begun dipping its toe in the U.S. market.

Joint locations with Wendys in Canada had done well. Joyce figured the key was to merge with the U.S. burger giant.

Joyce became Wendys' single largest shareholder with a 13.5 per cent stake in a deal valued at $540 million.

But the deal proved to be better for Wendys than Tims. A decade later, Tims had opened just 272 U.S stores while the rest of the chain was propping up Wendys' sagging profits and sales.

Last summer, hedge funds began sniffing around the troubled burger chain, starting with Pershing Square Capital Management, which first floated the notion of spinning off Tim Hortons.

The Popularity

It's lunch hour in the bustling food court beneath Bay Street's bank towers. The underground mall is packed with office workers hiding from blistering winter weather.

At the Tim Hortons counter, sandwiched between a McDonalds and a Quizno's sub outlet, the line-up is 20 people deep and growing.

It's not an unusual scene at Canada's largest fast food chain. The numbers supporting this claim speak volumes:

Tim Hortons dominates coffee and doughnut sales in Canada with a 74 per cent market share, according to company documents that cite market research by the NPD Group Inc.

The chain holds 22 per cent of the $14 billion-a-year fast-food market in Canada.

By sales, it is 25 per cent larger than its nearest competitor, McDonalds Restaurants of Canada, itself a global icon.

Although Starbucks has more cache and receives more media attention, Tim Hortons is the true star of the coffee business.

In fact, to most Canadians, the brand is as much of a patriotic symbol as the beaver and the maple leaf.

That success has translated into dramatic sales growth and profit over the years as the company moved beyond its initial format, adding fresh sandwiches, soup and bagels.

In the past five years, sales have jumped 62.5 per cent to $1.3 billion (U.S.) while profit has more than doubled to $205 million. Still, coffee dominates sales, accounting for 42 per cent of all transactions in Canada, the company reports.

Tim Hortons operates 2,801 restaurants, including 600 small kiosks within gas stations, convenience stores, university campuses and hospitals. Tim Hortons restaurants in the United States are mostly located in the northeast and midwest - the most popular is in Buffalo, where Horton played his last two seasons.

But can Tim Hortons keep up the pace? And what happens to its U.S. sales when it is no longer part of the better known Wendys chain? At this point, it's anyone's guess.

The Difficulties

Joyce, who officially severed ties with Wendys three years ago when he sold his shares and quit its board, said Tim Hortons is still a great brand and a great business.

But he'll pass on Tim Hortons stock when it comes on the market later this month. Instead, he's been gradually buying back into Wendys, its struggling U.S. parent company.

"I think Hortons has great potential," Joyce said in an interview Friday. With a strong management team and sound business principles, Joyce said the company has room to grow, particularly in urban Canada and the U.S.

"The obvious way to grow is south of the border," Joyce said, adding that's why he put the two companies, Tim Hortons and Wendys, together back in 1995.

He acknowledges the company could face challenges expanding in the U.S. on its own.

Competition in the food business is tougher there and the brand isn't as well known south of the border, Joyce said.

But Hortons has enjoyed great success so far with its U.S. stores, Joyce adds.

According to company documents, same-store sales south of the border grew a healthy seven per cent in the first nine months of last year.

Joyce's statement that he's not planning to invest in Tim Hortons raises more questions than answers.

He said he thought the way to tackle the U.S. market was through a merger with a well-known U.S. brand. "What I didn't understand at the time was the weakness of the Wendys brand," he said. "It's no secret that Hortons has been carrying Wendys for some time."

The coffee and doughnut chain has accounted for most of Wendys' sales growth and profits in recent years amid turmoil in the burger segment that also hurt McDonalds and Burger King.

An incident last year in which a woman tried to sue Wendys, claiming she'd found a severed finger in a bowl of chili, also hurt sales. The woman later pleaded guilty to attempted fraud.

Joyce said he tried to get Wendys' founder, the late Dave Thomas, and chief executive officer Jack Schuessler to consider restructuring the company six years ago, and even introduced them to Nelson Peltz. But they weren't interested.

Now, Peltz is calling the shots at Wendys and Joyce, along with other Wendys shareholders, stand to reap the benefits.

The Future

Wendys' share price has already jumped 34 per cent since last July 28, when the struggling burger chain finally agreed to sell at least 15 per cent of its stake in Tim Hortons.

It closed Friday at $60.54 on the New York Stock Exchange, up $2.10 on the day after announcing it would also sell its Baja Fresh Mexican fast-food chain and give Peltz three seats on its board.

The IPO hasn't even hit the market yet. The first tranche of Tim Hortons shares is scheduled to hit the market on March 24, according to sources. Priced between $21 and $23 a share, the company plans to sell between 29 and 33 million of them.

Much of the proceeds, an estimated $767 million, along with a $500 million loan, will go to pay down an obligation to Wendys, according to company documents filed with securities regulators. Like most activist investors, Peltz is betting the sum of the parts will be worth more than the whole.

Despite Joyce's ongoing interest in Wendys and Tim Hortons, he said he has no desire to return to active involvement in either firm.

"I'm 75 now. I've got a good quality of life that I really enjoy," said Joyce, who divides his time between golfing and the Tim Horton's Children's Foundation. But it's clear he can't resist dabbling in the coffee and doughnut chain's business.

Recently, he met with Canadian General Rick Hillier in response to a demand from Canadian troops based in Kandahar for a taste of home.

He's since talked to Tim Hortons management about how quickly they could open a restaurant in the Afghan capital.

"It's in the works," Joyce said. "We're going to make it happen."

And that's what he meant when he said Tim Hortons is a great brand: The troops miss their family first, but their Tim Hortons coffee second. "We're a bit like a cult."