Wendy's Sale of Arby's, A Move Back to Basics & Back to Growth (WEN, MCD, YUM)

Wendy’s/Arby’s Group, Inc. (NYSE: WEN) is soon to just be Wendy’s again, sort of.  The company has been exploring alternatives to try to unlock the value of the two unsuccessfully merged Wendy’s and Arby’s brands and there is now a deal in the works.  Wendy’s/Arby’s has announced the sale of Arby’s Restaurant Group, Inc. to a buyer formed by Roark Capital Group, an Atlanta-based private equity firm, with an aggregate transaction value of some $430 million.

Since Wendy’s merged with Arby’s, the fast-food sector has been heavily dominated by the likes of McDonald’s Corporation (NYSE: MCD).  Wendy’s has declined in value since the merger and McDonald’s has seen its shares rise by more than 50% over the same time period.  Yum! Brands, Inc. (NYSE: YUM) has almost doubled.

Wendy’s will effectively retain an 18.5% ownership interest in the Arby’s business. While Arby’s has not been able to add much value to Wendy’s of late, it has been easy to forget that Arby’s is the second largest quick-service sandwich chain, i.e. fast-food chain, as it has more than 3,600 systemwide locations.

The formal terms of the agreement will allow Wendy’s/Arby’s Group to receive about $130 million of cash at closing.  The deal is subject to “customary adjustments” and Wendy’s will still get to retain a common ownership interest of 18.5% in the Arby’s business.  That has an expected value of about $30 million.  Where the rest of that $430 million is derived in the total valuation is that Roark Capital is set to assume about $190 million of corporate debt that is related to Arby’s that is mostly tied to capital lease and sale-leaseback obligations.  Another boost, well sort of, is that the transaction will create an income tax benefit to Wendy’s/Arby’s Group of roughly $80 million that will be realized over the next two years.

While this looks to have been a net-loss so far (due to that tax benefit), Wendy’s/Arby’s maintains that this creates value for its holders, is expected to be accretive to earnings, and it is also expected to de-leverage the balance sheet.  The company also plans to now solely focus on Wendy’s by revamping its menu, expanding breakfast opportunities, modernizing and remodeling, and building new domestic and international restaurants.

Wendy’s/Arby’s Group noted that the “discontinued operations” status should occur in its second quarter 2011 financial results and should close early in the third quarter, subject to regulatory approvals and customary closing conditions. Roark will invest $180 million and own a $180 million non-dividend paying preferred stock interest and an 81.5% common stock interest.  Roark will also commit to invest an additional $50 million into Arby’s under certain circumstances through 2013 to provide liquidity and growth capital.  Roark will also receive preferred stock in return for that additional investment.

Wendy’s/Arby’s closed at $4.52 on Friday with a market cap of almost $1.9 billion and with a 52-week trading range of $3.83 to $5.22.  Shares are indicated higher, although there is still more than two hours until the market opens and formal price indications are not yet clear.

On July 25, 2005, Triarc acquired RTM Restaurant Group, Arby’s largest franchisee, and formed Arby’s Restaurant Group, Inc., an Atlanta-based company comprised of more than 3,500 restaurants.  Of those, Arby’s Restaurant Group owns and operates more than 1,000 restaurants located in the United States.  On September 29, 2008, Triarc Companies Inc. merged with Wendy’s International, Inc. to form Wendy’s/Arby’s Group, Inc. Wendy’s/Arby’s Group, Inc. is now listed as the third largest quick-service restaurant company in the United States.

September of 2008 was an unfortunate time to close on a merger as it was right before the recession went into hyper-drive.  Wendy’s shares went from $5.22 to $5.67 on the news on the day the deal was announced. With shares at $4.52 today, it has not exactly lived up to expectations.  Thomson Reuters still has a consensus price target objective of roughly $5.66 for Wendy’s/Arby’s.

JON C. OGG