I love this quote from Nelson Peltz, Chairman of Wendy’s/Arby’s Group, in the company’s press release today, “We believe the way to maximize shareholder value is to focus all of our management and financial resources on continuing to build the Wendy's® brand.”
Although I would tend to agree with this statement, the first thing I thought of was the company’s initial rational for the transaction…. I thought putting the two brands under one roof was the best way to maximize shareholder value? Just over two years ago when the company announced the completion of its merger, Roland Smith, President and Chief Executive Officer of Wendy's/Arby's Group said, “As one company, we are well-positioned to deliver long-term value to our stockholders through enhanced operational efficiencies, improved product offerings, shared services and strong human capital.”
So what has changed over the last two years? Wendy’s business has improved with restaurant level margins moving higher YOY almost every quarter since the merger (3Q10 margins were impacted by higher commodity costs) while Arby’s trends have continued to decelerate with margins down every quarter.
On May 19, 2010, we published a note titled, “WEN - Undervalued Yes, Where is the Opportunity?” that discussed WEN’s stock and provided a sum-of-the-parts analysis that suggested that the company’s stock was trading below its intrinsic value. Specifically, we highlighted the fact that the Wendy’s brand alone accounted for more than 100% of the value of the company, which implied not only that investors were seemingly getting Arby’s for free but also that the significant erosion of the Arby’s brand was overshadowing Wendy’s value as a standalone concept. Our sum of the parts analysis (shown below) shows that the Wendy’s brand continues to be undervalued.
Given Trian Partners’ past success in creating value from mispriced securities, WEN management must recognize that they can unlock value by spinning off Arby’s. And, it is likely not a coincidence that management is putting Arby’s up for sale after 4Q10 company same-store sales trends improved to +3.1% from -9.5% in 3Q10, implying a 325 bp acceleration in two-year average trends and the first quarter of positive comp growth in at least 15 quarters.
Howard Penney
Managing Director
