Markets & Finance

A Fresh Hunger for Wendy's


Shares shot higher Tuesday on a report that billionaire Nelson Peltz's Triarc Cos. is willing to bid on the fast-food chain

Wendy's International (WEN) shares spurted higher on July 31 on news that billionaire Nelson Peltz said his Triarc Cos. (TRY) is willing to offer $37 to $41 a share to buy the third largest fast food chain in the U.S. However, Peltz is balking at Wendy's request to sign a confidentiality agreement as part of the sale exploration process, according to the Wall Street Journal.

Peltz's Triarc Cos. owns the Arby's chain, which operates more than 3,000 restaurants that compete with Wendy's. Peltz also runs Trian Fund Management, which recently raised its stake in Wendy's to 9.8% and has been pushing for the company to increase shareholder value, including the spin-off of the Tim Hortons coffee chain and the sale of the Baja Fresh chain to an investment group. The company is also pursuing strategic alternatives for Cafe Express.

In a letter to Wendy's chairman James Pickett that was filed with the SEC, Peltz said Arby's would be a "natural, strategic buyer" for Wendy's. Peltz's bid could go even higher if Peltz's Trian fund is given access to confidential financial information. He also expressed frustration with the special committee's sale process, which he claims does not encourage bids from strategic buyers like Triarc.

He also noted that certain conditions in offered staple financing created disadvantages to his Triarc company as a "synergistic buyer," notes UBS analyst David Palmer, adding that it is unclear what this means from what was said in the letter. If the company doesn't sign Peltz's proposed confidentiality agreement by the end of the day on Wednesday, Aug. 1, he said he would consider other alternatives.

Peltz left the door open to raising his offer, notes John Owens, an equity analyst at Morningstar. He adds that Peltz wants to explore other means of financing, and may be able to get better terms for the financing, but the way the sale terms are structured is getting in his way. "If Triarc does not receive a favorable response by the deadline, then Peltz will consider his other alternatives, which we believe could be more hostile," Owens says.

Owens points out that Peltz's current offer is a modest premium to his fair value estimate of $35 for Wendy's, and a transaction would probably take several months to complete. He believes that a deal with Triarc "could bring out some synergies with its Arby's chain."

Shares of Wendy's, which operates around 6,600 restaurants, rose 4.5% to $35.23 on July 31. The shares have traded between $30.29 and $67.19 in the last year.

Peltz isn't the only one pushing a sale of Wendy's (see BusinessWeek.com, 6/18/07, "Wendy's: On the Buyout Menu?"). Back in early May, Highfields Capital Management, which owns almost 9% of Wendy's shares, urged Wendy's to sell itself, saying the company needed new ownership to turn things around.

If Peltz doesn't end up buying Wendy's, other bidders could emerge, such as private equity firms. Another potential buyer could be Yum! Brands (YUM), the owner of KFC, Pizza Hut, Taco Bell, Long John Silver's, and A&W All-American Food Restaurants. "We still view YUM as a logical fit for acquiring WEN – potential for international expansion and multibranding would round out YUM’s brand portfolio very nicely," wrote AG Edwards analyst Steve West in a note on July 26. "However, we would not rule out other possible buyers or even remaining public and continuing on the current turnaround course."

Noting that Wendy's management did not mention progress about a sale or its strategic review when it reported quarterly results on July 26, West said: "...the shares will continue to trade on sale speculation versus fundamentals until the final word is received.

Wendy's is in the early stages of a turnaround, says Morningstar's Owens, but it has faced some headwinds recently. It has suffered from all-time-high beef costs, the infamous chili finger hoax, and hurricanes, along with management miscues, including a slip in operating standards, a dearth of new products, a poorly timed price increase on its Junior Bacon Cheeseburger, and a weak ad campaign, he says. Meanwhile, McDonald's (MCD) and Burger King (BKC) improved their competitive positioning on all these fronts, he says.

The upshot: Wendy's limped along in 2003 and 2004, then same-store sales fell more than 3% in 2005 and edged up less than 1% last year. Profitability also suffered: operating margin plunged to 1.7% in 2006 from 11% in 2002, Owens notes.

Since then, the company has listened to shareholders and shed some assets. It also reorganized its management. Owens says he's optimistic about the burger chain's new products, including $2.99 Deluxe Value Meals, a 4-Alarm Spicy Chicken Sandwich, and a Frosty Float. Wendy's also plans to roll out breakfast to 20%-30% of its restaurants by the end of 2007 and to more than half of the chain by the end of 2008. "These additions to the menu, along with remodeling of restaurants, should spur higher top-line growth," he says.

Owens thinks that ultimately, Wendy's is likely to be acquired within the next six months. "It's just a question of price and who" buys it, he says.

McCormack is senior producer for BusinessWeek.com's Investing channel.

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