Dr. P.V. Viswanath

pviswanath@pace.edu

Wendy's/Arby's Gets Cooking With New Management Team

JACQUELINE DOHERTY, BARRON'S INSIGHT, JULY 4, 2009

A Shares of Wendy's/Arby's Group have slid more than 30%, to around $4, since April, amid worries about declining sales at Arby's and management's reluctance to reveal how it will use the proceeds from the company's recent $565 million bond offering.

But the prospects for greater operating efficiencies and rapid growth in the restaurant chain's cash flow suggest the shares could be worth at least $6 apiece -- and maybe as much as $9 in the next few years.

Founded 40 years ago by the late Dave Thomas, Wendy's is the third-largest fast-food chain in the U.S., behind McDonald's and Burger King. The company has long prided itself on serving hamburger patties that weren't previously frozen. And it was way ahead of the pack in featuring salads. Mr. Thomas, who starred in Wendy's commercials and became its public face, died in 2002.

Today, the company is controlled by Nelson Peltz and Peter May, who have built a substantial record as investors in the food-services industry.

Messrs. Peltz and May were investors in Wendy's, and their investment company, Triarc, owned Arby's. The two chains merged last September, giving the pair a 22% stake in the combined entity.

Arby's, which specializes in roast-beef sandwiches, contributed one-third of the company's 2008 revenue of $3.7 billion, and about 35% of operating income. Last year, Wendy's/Arby's lost $3.05 a share, largely due to merger-related costs. The company is expected to earn 19 cents a share this year, and 28 cents in 2010.

Roland Smith, Wendy's/Arby's CEO, is aiming to save $60 million through post-merger cost-cutting, and another $100 million by boosting Wendy's operating margins, now just 12%. Last year, he hired David Karam, the head of one of Wendy's largest and most-successful franchisees, as Wendy's president, a move praised by Pamela Thomas Farber, Mr. Thomas's daughter.

Mr. Smith sees Arby's expanding to 5,000 outlets from today's 3,500, and Wendy's adding another 1,000 stores to its current 6,000. A new store can provide a 20% return on invested capital.

As for the bond offering, some investors say the company didn't need the money, as it will generate more than $100 million of free cash flow this year. But "our philosophy is that when money is available, you take it, and take the risk out of your balance sheet," says Mr. Peltz.

Wendy's will use $132.5 million of the offering proceeds to repay some of its bank debt. The company says the remainder will be used for general corporate purposes, which could mean working capital, acquisitions, dividends or stock buybacks.

Mr. Peltz says it would be foolish to pay a special dividend. But he doesn't rule out a buyback as he, too, thinks the shares are cheap.

Questions:

1. How would yo