Fast food chain Wendy's (NYSE:WEN) sold its Arby's chain, completing the deal that was announced in June. Private equity firm Roark Capital Management was the buyer, with the total deal valued at $430 million. Wendy's immediately reverts back to its solo company name, but its stock symbol remains the same.

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A Deal by the Numbers
The breakdown of the deal is as follows: Wendy's will receive $130 million in cash, while Roark will assume $190 million in debt. Wendy's will retain 18.5% ownership in Arby's, valued at approximately $30 million, with Wendy's further expecting income tax benefits of roughly $80 million that will accrue over several years. (For related reading, see Why Food Is Still Cheap In America.)

A Very Brief History of Wendy's/Arby's
Investor Nelson Peltz merged Wendy's and Arby's in 2008, but the combined company has struggled particularly with the Arby's division. Despite the recent quarter's results, which saw same store sales grow 5.5% for Arby's, Wendy's struggled with an 0.3% increase, Arby's has been the drag on the combined company during most of the marriage of the two fast food chains.

Both have faced and will continue to face fierce competition in the fast food space from many directions and rivals as diverse as, but not limited to, Yum! Brands (NYSE:YUM), Jack In The Box (Nasdaq:JACK), as well as specialty fast food places such as Panera Bread (Nasdaq:PNRA) and even the current superstar, Chipotle Mexican Grille (NYSE:CMG). While there are consumers loyal to the various fast food brands, consumers also cross brands, levels and restaurant selections in their dining. Therefore, charting the course for a successful fast food company is not easy. (For related reading, see The Big Mac Index: Food For Thought.)

Turnaround
While much of the focus was on the turnaround needed for the Arby's chain, which is true enough, not enough has been said about the need for a turnaround with Wendy's. The revenue for Wendy's naturally increased as sales from its Arby's division were added into the results the last few years. If, however, investors examine the net income or better yet, earnings per share, it shows Wendy's as Wendy's/Arby's had 14 cents EPS in both 2010 and 2009, a loss of $1.22 per diluted share in 2008, a profit of 53 cents in 2007, and a loss of 2 cents in 2006. For much of the combined results, as we mentioned, Arby's was a drag on the Wendy's earnings, but even at that, Wendy's operations have been very uneven.

Wendy's in the Spotlight
With Arby's now out of the picture, the focus will be on Wendy's operations. The shedding of not only Arby's but the $190 million in debt should also help clarify the task ahead for Wendy's management. Yet as of January, 2011, Wendy's carried more than $1.5 billion in debt, so while the $190 million of debt assumption by Roark in the deal is helpful, it's not a panacea. Without the drag of Arby's, Wendy's should be able to improve its cash flow, certainly the lifeblood of the restaurant business. Free cash flow has also been uneven over recent years.

The Bottom Line - Now What?
Wendy's needs to tend to its core business, its North American restaurants, and produce growth there, which essentially it hasn't done enough of through the recession. Its expansion plans for places such as China, Brazil and Russia are ambitious, but we'll have to see how wise this is. Although Yum! Brands has made tremendous inroads in China, this initiative for Wendy's will mean far less if it doesn't strengthen its North American operations. The stock has often languished under $5 a share, which tells you investors view this as a turnaround and need to be shown the proof. (For related reading, see Turnaround Stocks: U-Turn To High Returns.)

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