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Tickers in this Article: WEN, SBUX, BKC, MCD
Before the opening of the market on Monday morning, June 18, well-known burger chain Wendy's (NYSE: WEN) lowered its EBITDA guidance for the year by about $35 million.

There had been rumors of private equity interest in the company. Monday's news could hurt what type of a premium, if any, shareholders could receive for their stock.

A Bit of Bad Timing
Along with the lowered EBITDA guidance (from $330-$340 million down to $295-$315 million), management also revised its earnings forecast and now expects the company to earn between $1.09 and $1.23 per share for the full year. That's down sharply from the $1.26 to $1.32 per share it had previously expected. (To learn more, read A Clear Look At EBITDA and Can Earnings Guidance Accurately Predict The Future?.)

The company blamed lower than expected same store sales and rising commodity costs for its woes.

Things could be worse. It's not like the company is bleeding cash and is expecting to post major losses going forward.

However, it certainly isn't good news for shareholders, and the timing is just plain lousy as competition in the fast food game is getting fierce and there are rumors of a private equity buyout.

Competition Heating Up
Wendy's doesn't need any problems right now. It's facing stiffening competition from Starbucks (Nasdaq: SBUX), McDonald's (NYSE: MCD) and Burger King (NYSE:BKC) and their new breakfast items.

Also, McDonald's and Burger King are now offering extended hours, which they are aggressively advertising. This could place even more pressure on the company, and draw away even more foot traffic down the line.

So, what about Wendy's foray into the breakfast arena? I'm assuming that this revised guidance implies that we shouldn't expect too much from the company on this front over the next few quarters.

Comeback Could Be Painful
I think Wendy's reaction to these woes will be for it to ramp up its own advertising and promotional activity. And unfortunately, I believe that this could put a serious pinch on its margins over the next couple of quarters.

This is not what I wanted to see, particularly with the competitive landscape really starting to heat up.

The Acquisition Wild Card
In early May, I suggested that a private equity firm might make a bid for Wendy's. If the company operates as a private enterprise, it could save money by not having to adhere to the rigorous financial reporting required by the exchanges and the SEC.

In addition, I suggested that Wendy's had some pent up value in real estate that a savvy management firm could probably realize through strategic asset sales. Among the most likely suitors I named was a company called Triarc. (To read the Glenn Curtis' initial take, see Buyout Or Not, Wendy's A Good Deal.)

My opinion hasn't changed. Wendy's would probably be better off in private hands.

For what it is worth, in conjunction with its revised guidance, the company also said that a special committee of its board of directors is exploring "strategic options", and that it's also entertaining the possible sale of the company as a means of unlocking shareholder value.


However, I doubt a private equity firm or any other entity will want to step in and make a bid now. If they do it won't be the same sort of boon for investors that it could have been.

Given the revised outlook, I think that any potential suitor would probably wait for the stock to pull back - perhaps to the low or mid $30s, before making any bid. Frankly, this could happen soon if the sell side starts to reflect the company's new earnings guidance in its research reports in the weeks and months ahead.

Even if the stock does pull back and a bidder emerges, that entity might use management's downbeat guidance as an excuse to present a low-ball offer.

The Bottom Line
I continue to like Wendy's, and if I owned the stock I'd probably continue to hang on to it. However, if I were sitting on the sidelines, I would definitely wait for an improved (or at least more stable) earnings outlook before jumping in.

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