Pesky billionaire Nelson Peltz is asking No. 3 hamburger chain Wendy's
Pershing Square asked for a total restructuring but focused on getting Tim Hortons, the largest quick-service restaurant chain in Canada, jettisoned from Wendy's holdings. Mr. Peltz, on the other hand, wants Wendy's to become a pure play in hamburgers. He wants to say adios to Tim Hortons, along with Baja Fresh Mexican Grill, Cafe Express, and Pasta Pomodoro.
Wendy's had been doing a bit of housecleaning to its balance sheet before the major shareholders started grumbling. In February, the company took a $190 million goodwill impairment charge against 2004's fourth-quarter results for Baja Fresh, resulting in an income tax benefit.
But at the beginning of this month, Wendy's claimed it wasn't trying to silence its critics when it announced it was selling 15% to 18% of Tim Hortons in an initial public offering with an expected value of $600 million. The spinoff will use IPO funds plus a term loan to repay debt owed to Wendy's. That would add some cash to Wendy's coffers: Wendy's has a net debt (total debt minus cash) of $458.4 million.
This only presents a part of the story, though. Mr. Peltz's contention is that Wendy's core restaurants have consistently underperformed relative to their peers and potential -- his investment company in turn advocates a complete sale of Tim Hortons and the three ancillary brands. The reason, ostensibly, is to promote an internal focus on improving the core brand's operating performance, which Peltz and his company reported to have margins 10% short of peer group performance due to reportedly bloated location-specific overhead costs. The hope is that divestitures would provide the necessary firepower, and focus, to pep up Wendy's results and do share buybacks, stated goals of Peltz's investment company.
It still remains to be seen whether Wendy's will be radically restructured, although that is becoming increasingly likely. All the news has sent Wendy's stock to an all-time high Wednesday. The stock trades for 23.2 times next year's expected earnings. That's a rich premium to the 16.3 times McDonald's
Investors would be wise to remember this is a restaurant stock (not a big growth stock), and the business purge is only being demanded by two large shareholders, so it is not a given that the company will diet itself down to its core Wendy's operation.
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