Buyout Or Not, Wendy's A Good Deal (WEN)

By Glenn Curtis | April 28, 2007 AAA

Because of its smaller geographic footprint and low-profile advertising, Wendy's (NYSE: WEN) has almost always played second fiddle to McDonald's (NYSE: MCD) and Burger King (NYSE: BKC).

But that might change soon, particularly if the company is sold-off to a private equity venture or another deep-pocketed entity as some are speculating.

Could this actually happen? The simple answer is yes.

Potential Buyers
Obviously, there are lots of possible buyers out there, but the No.1 prospect everyone is talking about is a company called Triarc which is run by billionaire financier, Nelson Peltz.

Why Triarc, and why Peltz?

Peltz is an activist shareholder who has earned a reputation in the restaurant industry as a savvy manager. He also loves underdogs and turnaround situations, such as Arby's which he is currently in the process revamping. (To learn more, read Cashing In On Corporate Restructuring.)

One more thing also makes him a logical fit. Peltz also heads up a firm called Trian Fund Management -- which "coincidentally" is said to own a little more than 8% of the Wendy's shares. Convenient?

In any case, I view Peltz as a positive influence.

After all, he has been extremely vocal in his efforts to enhance shareholder value over the last several years. In fact, he was behind, or at least in support of, the company's move to sell its underperforming Baja Fresh Mexican Grill concept. He was also a big supporter of the company's successful Tim Horton's (NYSE: THI) spinoff.

Both were great ideas, and now his sights may be set on Wendy's, which many feel would compliment to his investment portfolio.

Wendy's Isn't Cheap
Many are asking, "why Wendy's?" After all, at about 29-times this year's consensus estimate of $1.27 a share, it's not exactly cheap. The answer could be that the company has a lot of "pent up" value in real estate. Theoretically Peltz and his team could sell-off the real estate piecemeal.

In fact, some analysts have estimated that the company could raise money by selling-off several hundred pieces of property/buildings, without destroying the franchise the company has worked so hard to build up.

Certainly the current management team could do that too, but speculation is that Peltz, with his connections and money, could do it quicker and much more profitably.

Will Peltz Pay a Premium? That remains the $64,000 question. After all, other competitors have compelling stories and business models, but aren't anywhere near as expensive as Wendy's. For example, McDonald's trades under 20-times this year's consensus estimate of $2.69 per share, and Burger King trades at just over 22-times this year's estimate of $1.06 per share.

Lots of Upside for Wendy's
However, Wendy's has many things that could potentially drive the stock. The prospect of being bought out is just one of them. The company also has new breakfast offerings that it will be rolling out soon and which could be instrumental in driving sales and the stock. It also has several new lunch and dinner menu items which should help drive comparable stores sales over the next few quarters.

In other words, a buyout is just one potential catalyst that could drive the stock.

The Bottom Line
I think the potential catalysts mentioned above mean the stock has another 10% to 20% in it over the next year. If a buyout doesn't materialize over the next 60 to 90 days, I think that the stock could see some selling pressure, however, this is only real near-term risk that I see.

Buyout or not, I continue to like Wendy's as an investment.

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