WEN – Milking the cash flows!

My first two meetings with Roland Smith, CEO of WEN, were extremely positive and I really thought the company was on the right track. The reality of the situation is much different due to Trian influence on the Board.

 

Today, Wendy's/Arby's Group (WEN) and Trian Fund Management, L.P. entered into a renewed services agreement and other "new" agreements. Trian's principals, Nelson Peltz, Peter W. May and Edward P. Garden are on WEN's board and effectively control 22% of WEN.


In addition, we recently learned that WEN also plans to issue $550 million in senior unsecured debt; the proceeds will be used to pay off about $125 million in existing debt and fund strategic initiatives. The key "strategic growth initiatives" include new unit development and acquisitions of other restaurant companies. WEN also suggested that they could return the capital to the stockholders.

 

Given the selfish nature of today's filing, my bet is that Train wants to "MILK" WEN of the cash.


The WEN story is cost cutting story. The new services agreement does not appear to help the company achieve those goals. There is NO REASON for WEN to be paying Trian any fees for their services. Every dollar in cash this company generates should be going to upgrading the assets and improving top line sales. Putting more money in the pockets of people who already have billions only destroys shareholder value.


According to the agreement, WEN will be paying for the following; "consultation and advice in connection with sourcing, evaluating and executing (including, without limitation, preparing financial models and other analyses and reviewing documentation) acquisitions of the capital stock or assets of other quick service restaurant businesses or other related or complementary businesses or assets; consultation and advice with respect to corporate finance and investment banking, including, without limitation, evaluating and executing capital markets and debt financing transactions and advice and assistance in connection with the negotiation of agreements, contracts, documents and instruments related thereto; consultation and advice with respect to strategic initiatives to increase stockholder value, including, without limitation, financial, managerial and operational advice in connection with the quick service restaurant business, including advice with respect to the development and implementation of strategies for improving the operating and financial performance of the Company; consultation and advice in connection with legal matters relating to the foregoing; and such other services related to the foregoing as management of the Company shall reasonably request from time to time."

WEN is paying $1 Million a year for this? Plus, Trian get a fee if WEN makes an acquisition.


What is even worse is the "Liquidation Services Agreement?" Trian Partners is going to help WEN in "liquidation or other disposition of certain investments that are not related to the Company's core restaurant business ("Legacy Assets")." For this privilege, WEN will pay Trian Partners a one-time fee of $900,000 for these services. Furthermore, if the disposed assets are valued in excess of $36.6 million then WEN will pay Trian Partners, in cash, a success fee equal to 10% of the aggregate net proceeds. Lastly, WEN is leasing Trian a plane.


Publically traded companies that are run like private companies make lousy investments for the remaining shareholders!

 

WEN – Milking the cash flows! - wen


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