Overview of the Transaction
Upon completion of the transaction, the new company is a combination of two national brands with over 10,000 restaurants in the U.S. and approximately $12.5 billion in system-wide sales. The Arby's and Wendy's chains are roughly 70% franchised. The Arby's system is roughly 3,700 units across the U.S. and Canada, and generates system-wide sales of approximately $3.5 billion. Currently Arby's has plans to open 50 company operated units and 100 franchised units in 2008. The Arby's system had commitments from franchisees to open almost 400 new units over time. Wendy's is the third largest quick service hamburger chain in the world with more than 6,600 restaurants and system-wide sales of approximately $9 billion.
The deal terms include Wendy's shareholders receiving 4.25 shares of Triarc Class A Common Stock for each Wendy's share they own. According to the Merger Agreement, the Board will have 12 members, including two directors nominated by Wendy's. Arby's and Wendy's will operate as autonomous business units headquartered in Atlanta, Georgia, and Dublin, Ohio, each led by brand CEOs. A support center headquartered in Atlanta will be created to manage all public company responsibilities and other shared services. Roland Smith will serve as the CEO of the parent company, as well as of the Wendy's brand. Tom Garrett will become the CEO of the Arby's brand and Steve Hare will be CFO of the parent company.
- Re-energizing the brands - Revitalize the advertising message by focusing on the quality heritage created by Dave Thomas. Also, improve the new product innovation pipeline and expand dayparts like breakfast and snacks.
- Improving operations and margins - Improve Wendy's store operations and margins by developing an ownership mentality at company-owned stores. Currently, Wendy's store level margins are more than 400 basis points below where they were six years ago. This could take as long as three years to achieve.
- Shrinking the corporate structure - Management has identified $60 million in synergy savings. We can only imagine the bloodletting that is going to happen in Dublin. According to management, these savings will take approximately two to three years to fully realize.
- In the world of M&A changes never come easy.....
- Issue #1 - the restaurant industry rarely sees a successful M&A transaction. The turmoil that is created through combining the employees and the franchise system is draining and very unproductive. The risk of increased turmoil within the Wendy's system is even greater with Roland Smith, a Wendy's outsider, as CEO of the Wendy's brand. I do not believe that anyone outside the Wendy's system has ever managed the brand. It will take a special person to win the hearts and minds of the Wendy's system.
- Issue #2 - Arby's has strong penetration in the Midwest, like Ohio, where the chain has over 300 restaurants. Wendy's, headquartered in Ohio, is also very strong in the Midwest. We believe that the restaurant industry is a zero sum game; it's likely that competitive issues will crop up among the Wendy's and Arby's franchise systems.
- Issue #3 - It's very difficult to fix restaurant level margins in an environment where customers are strapped and food inflation is rampant. In addition, Wendy's biggest rival, McDonald's, is very well positioned and has lots of relative momentum.
- Issue #4 - Both chains lost market share in 1Q08.
- Currently pro-forma EBITDA for the New New WEN is around $350-$400 million in EBITDA.
Transaction Rational and Valuation Matrix