Wendy's Is For Sale, But Is There Any Value?

Stock Tickers: WEN, THI, YUM, BKC, MCD

When companies announce they will finally start accepting offers to be acquired, it usually creates at least some interest in the stock.  When Wall Street has been hoping for it and that is the final answer the same day it has to issue an earnings warning then it mutes the impact.  This is Wendy’s International (WEN-NYSE).  James Pickett, the company’s Chairman, noted that a sale remains only one option.  After all, it has been ‘exploring ways to drive value’ since April 25.  Shares are actually up from the low $30’s before a review was made.  On May 15, it announced it had hired JP Morgan as lead advisor and Lehman as co-advisor.

Wendy’s revised range for EBITDA is $295-315 million, down from previous guidance of $330-340 million.  The revised range for EPS is $1.09 to $1.23 per share, down from prior guidance of $1.26 to $1.32 issued on March 20.  The primary reasons given for the revised outlook are lower-than-planned same-store sales and higher commodity costs. Same-store sales were up 3.8% at U.S. company restaurants in the 2007 first quarter and are up 0.7% in the 2007 second quarter through June 15.  More issues ahead are now unknown: in view of the strategic review process now under way, it is suspending its previous earnings guidance for 2008 and 2009, and does not plan to provide additional details on its earnings guidance or to update it.

If we take the mid-point of 2007 earnings at $1.16 and apply it to Friday’s close from before the news, we end up with a forward P/E ratio of 34.25.  If we take the adjusted price today down 3% around $38.50 then we get a forward P/E of 33.18.  Neither of these are cheap.  Sure there are issues and it could be turned around, but this puts the company in a predicament.  You can’t base a value on earnings alone, but that is where Joe Q. Public is going to start; and the conclusion is almost certainly going to be that the company is expensive.

Maybe a company such as Yum Brands (YUM-NYSE) would consider trying to make the company fit in with an A&W All American Food unit for burgers, but it might be a stretch the company doesn’t want to take and that is meant solely as conjecture.  Also, what is possible doesn’t mean it’s likely.  It has already spun off Tim Hortons Inc. (THI-NYSE), so that value has basically been realized.   It is hard to imagine that a Burger King (BKC-NYSE) or a McDonald’s (MCD-NYSE) would want  to take on the task of turning a company around  that would be either helping out competition or a risk of cannibalizing their existing franchises.

It is also seeking a securitization financing that could be used by a buyer or in a recapitalization.  The problem is that these may get harder and harder to sell as Wall Street has figured out most of the private equity tricks. 

Jon C. Ogg
June 18, 2007

Jon Ogg can be reached at [email protected]; he does not own securities in the companies he covers.