Buying Wendy’s on the Cheap by Jonathan Heller, CFA
Buying Wendy’s on the Cheap
When Triarc announced its takeover bid for Wendy’s in April, the stock deal was worth $2.4 billion, or $26.78 per Wendy’s share. That same deal, which calls for Wendy’s shareholders to receive 4.25 Triarc shares for each Wendy’s share, is now worth just over $2 billion, as both Wendy’s ($23) and Triarc ($5.50) shares have pulled back. In my book, $2 billion for Wendy’s is a steal. Just last year, Nelson Peltz, (who owns 24% of Triarc and whose firm Trian Partners owns 10% of Wendy’s), had offered up to $41 per share for the company.
The combination of Wendy’s-the 3rd largest US hamburger chain and Triarc, parent company of Arby’s, the nations’ largest roast beef sandwich chain, and 12th largest US quick service restaurant chain, will result in a 10,000+ store fast food empire, with annual sales in the neighborhood of$3.7 billion. If estimates are correct, the merger will save the combined entity about $60 million in annual costs.
The big question is whether Peltz can do it again, “salvage” another company (salvage is a rather strong word in Wendy’s case–although the company should be doing much better, it is not in jeopardy) the way he did with the former DWG Inc in the early 1990s. Value investors may recall DWG, parent of Arby’s, Royal Crown Cola, and a handful of other businesses, which was nearly run into the ground at the hands of Victor Posner, before Peltz and partner Nelson May stepped in. DWG became Triarc in 1993.
As far as I can tell, the combined entity will have about 460 million shares outstanding once the deal closes, and at Triarc’s current price, the resulting market cap will be about $2.5 billion. On an enterprise value basis, add in debt estimated at $540 million for Wendy’s and $745 million for Triarc, back out cash 0f $220 million for Wendy’s and $20 million for Triarc, and you arrive at an EV of about $3.5 billion.
Wendy’s is a great franchise which has disappointed recently, but one that I believe is capable of recapturing its former glory. Known for fresh ingredients, and typically among the top rated fast food chains by consumers (it was ranked first in Zagat’s 2007 survey); it would be hard to imagine the right management team not having a decent chance of getting Wendy’s to run on all cylinders. To that end, Triarc has recently announced several Wendy’s management changes; the jury is still out here.
For its part, Triarc’s Arby’s business appears to be doing ok, certainly not great (it’s often been difficult to tell based on Triarc’s results alone because of other transaction not related to the core business). Same store sales fell 1 .8 % for the quarter ended June 30th, not surprising given the economic environment, but Triarc is focusing more attention on being a restaurant company, having recently shed some other assets, and announcing Wendy’s deal.
Another reason to own Triarc is the fact that once the deal is complete, the company will own the real estate for 632 Wendy’s restaurants (plus 572 locations where they own the building only) in addition to the 130+ Arby’s locations it currently owns. That’s a nice little commercial real estate portfolio in addition to what might be a profitable restaurant marriage.
Jonathan Heller, CFA