Wendy's: On the Buyout Menu?

The restaurant chain said it may put itself up for sale

Wendy's (WEN), in the midst of a turnaround plan that's getting mixed reviews, said on June 18 it will explore a sale of the company. Shares moved about 3% lower in afternoon NYSE trading June 18.

A special board committee had already been looking at ways to boost shareholder value. "While a sale remains only one of the alternatives under consideration, we believe it merits more thorough examination," Wendy's International chairman James V. Pickett said in a statement.

Highfields Capital Management, which owns almost 9% of Wendy's shares, urged the move in early May. Highfields criticized the current management's strategy, saying Wendy's needed new ownership to turn things around.

Profits have revived since a disappointing 2006. To focus on improving performance of its Wendy's restaurants, the company slowed down the opening of new stores and sold off other fast food concepts.

Wall Street expected earnings of $1.27 in fiscal 2007. That was called into doubt Monday when Wendy's cut sales and earnings forecasts for the year. Earnings per share will be in the range of $1.09 to $1.23 in 2007, not the $1.26 to $1.32 forecasted in March.

Standard & Poor's analyst Mark Basham had already doubted Wendy's would deliver on its goals. In a report last month, he wrote that Wendy's "plans to achieve both its goals of improved efficiency and customer service are conflicting." He predicted earnings of $1.10.

(S&P, like BusinessWeek, is a unit of the McGraw-Hill Companies [MHP].)

Wendy's says lower forecasts are due to lower-than-planned sales and higher commodity costs. Same-store sales were up 3.8% in the first quarter, but rose only 0.7% in the second quarter through June 15.

It's not clear who would want to buy Wendy's at current prices. CIBC World Markets analyst John Glass wrote recently "there is no apparent logical buyer."

The total market capitalization of Wendy's is $3.38 billion. Private equity may be interested. The owner of Outback Steakhouse was taken private this month by the company founders and two private equity firms for $3.5 billion.

Wendy's said Monday it also is evaluating other financing schemes that could be used by a buyer or used in a recapitalization of the company.

Glass laid out some possibilities for a leveraged recapitalization, which could be similar to one undertaken by Domino's Pizza (DPZ) this year. In an asset-backed securitization, Wendy's could borrow $1.4 billion, pay down $520 million in debt and issue a large, one-time dividend of about $10 per share, Glass wrote earlier this year.

(CIBC World Markets seeks to do investment banking business with Wendy's.)