Wendy's eyes possible sale of No. 3 chain

Nation's Restaurant News, May 7, 2007 by Sarah E. Lockyer

DUBLIN, OHIO -- Less than two months after closing the original Wendy's Old Fashioned Hamburgers unit opened in 1969 by brand founder Dave Thomas, Wendy's International Inc. is reviewing "strategic options," including a sale of the company.

Late last month Dublin-based Wendy's said it had formed a special committee of independent directors to explore strategic actions for the parent of the No. 3 burger brand, which has more than 6,600 units, including "changes to its capital structure, a possible sale, merger or other business combination."

Analysts have predicted that Wendy's could undergo a going-private leveraged buyout by private-equity companies, most notably by the firm of activist investor Nelson Peltz, who through his Trian hedge fund holds an 8.3-percent stake in Wendy's. As an investor in Wendy's, Peltz had been instrumental in pushing the restaurant company to divest the Tim Hortons and Baja Fresh Mexican Grill chains and to use the company's more than $1 billion in cash for a special dividend and share repurchases to benefit shareholders. He also won seats for three nominees on Wendy's board of directors.

Peltz also is chairman of Arby's parent company, Triarc Cos. Inc., and speculation exists that Triarc may be even more likely to purchase Wendy's than would be Trian, because of perceived conflicts of interest related to Peltz's prior dealings with Wendy's. Just days before Wendy's disclosure that it was looking into strategic options, Triarc sold its other holding, investment advisory firm Deerfield & Co. LLC, for about $290 million in cash and stock. Triarc then said it would focus on creating value "through both organic growth and the acquisition of other restaurant companies."

Wendy's market capitalization is about $3.2 billion. Analysts have been targeting a per-share buyout price in the high $30s, which would create a total transaction price around $3 billion.

Still, some analysts have said Wendy's, instead of a sale, may choose to undertake a large recapitalization, perhaps with an asset-backed securitization like that recently completed by Domino's Pizza Inc. Securities analyst John S. Glass of CIBC World Markets in Boston outlined a scenario for Wendy's that includes its borrowing of up to $1.4 billion and use of the proceeds to pay down existing debt of $520 million and issue a one-time dividend of about $10 per share.

Wendy's also is likely to explore the benefits of refranchising efforts for its system. About 22 percent of the chain's U.S. units are owned by the franchisor, and its Canadian system is as much as 39-percent owned by Wendy's International, analysts said.

There have even been some rumblings, although faint, that Yum! Brands Inc., parent to the KFC, Taco Bell and Pizza Hut chains, could be interested in purchasing the Wendy's system.

Wendy's spokesman Denny Lynch said "everything is open" as options to the company and that it was "prudent" to look at all available alternatives.

"It makes sense when you have more options to look at those options," he said. "And today we have more options. A lot of people are jumping to conclusions. Right now, we have the ability to look at a wide range of options."

Wendy's said it would not provide updates, unless warranted, on the special committee's progress. It also said no timeline was in place and the formation of the committee does not guarantee a transaction will occur.

An outright sale of Wendy's would be an emotional move for some in the company who watched Dave Thomas build the brand through its square hamburgers and Frostys and Thomas's well-known television pitching. Thomas died in 2002.

The chain's namesake, Melinda Thomas, who was nicknamed Wendy, currently operates 32 units with her siblings. She told the Associated Press at the company's annual shareholder meeting in Dublin on April 26 that she would be disappointed in a sale.

"I hope it doesn't happen, but everything is going to work out the way it's meant to be," she told the AP.

Her sister, Molly Thomas, added, "I have an emotional tie, so yeah, if they sold the company I'd be very upset."

Yet, as private-equity firms continue to dive into the restaurant sector, sometimes with great success, a sale of the 38-year-old Wendy's seems likely to many familiar with the company and the current deal-making environment.

"I don't see a strategic buyer like Yum," said securities analyst David S. Palmer at UBS Equity Research in New York. "Most likely, I see Peltz shopping Wendy's around to a private buyer. My gut says Wendy's will go private."

It would be a move just like the one Burger King undertook in 2003, when it was purchased by a private-equity conglomerate that brought in new management, closed unprofitable stores and developed a pipeline of new products and advertising campaigns to reinvigorate the brand. Three years later--even though the jury was still out on whether Burger King successfully had turned its business around--the owners held an initial public offering that was one of the largest the restaurant industry had ever witnessed.