With the Sale of Arby's, Wendy's Stock Deserves a Fresh Look

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With the sale of Arby's, Wendy's Arby's Group Inc. (NYSE: WEN) may finally be ready to compete with rival McDonald's Corp. (NYSE: MCD). And the company's stock, which has plunged nearly 80% over the past four years, may finally see a rebound.

It was announced yesterday (Monday) that private equity firm Roark Capital Group would pay $130 million in cash for Arby's and assume $190 million in debt. Wendy's also will receive an $80 million tax benefit and retain an 18.5% stake in Arby's. The full value of the deal, expected to close in the third quarter, is $430 million.

The sale will furnish Wendy's with the cash the company needs to focus on its turnaround efforts, which include improving its breakfast offerings, remodeling its restaurants and expanding its overseas franchises.

"This transaction provides substantial value to our stockholders, as it is expected to be accretive to earnings, deleverage the balance sheet and allow us to devote our full attention and resources on the exciting growth opportunities we have at Wendy's," Roland Smith, Wendy's/Arby's chief executive, said in a statement.

Smith told Bloomberg News that the cash portion of the deal would be invested in "Wendy's growth opportunities" and not used to pay down more debt.

The split comes less than three years after Triarc Cos, Arby's parent in 2008, acquired Wendy's for $2.2 billion and created the third-largest fast-food chain in the world. At the time Wendy's was looking for a way to reverse a series of disappointing earnings reports, having stumbled in the years following the 2002 death of founder Dave Thomas.

The merger was intended to generate $60 million in annual savings by streamlining support services and corporate functions.

Unfortunately, the timing could not have been worse – the deal closed just before the 2008 financial crisis struck.

The merger also came just as consumers looking for healthier food and more appealing surroundings started to shift their business from fast food to "fast-casual" restaurants like Panera Bread Co. (Nasdaq:PNRA) and Chipotle Mexican Grill Inc. (NYSE:CMG).

Sales at both chains fell last year, with Wendy's slipping 2.7% and Arby's dropping 9.2%.

"You just have a lot more competition from the fast-casual space and from Subway," Peter Saleh, a restaurant analyst at Telsey Advisory Group, told Bloomberg.

Roark, which owns an assortment of 20 food franchises – including Cinnabon, Moe's Southwest Grill, Wingstop and Carvel Ice Cream – believes it has the expertise to revive the Arby's brand. It may have made a wise investment, as Arby's same-store sales in the first quarter were up 5.5%.

"We believe Roark is the right partner," CEO Smith told The Atlanta Journal-Constitution. "They see the value of the brand, and they have experience in running restaurants."

Meanwhile, efforts to revive Wendy's business have already begun.

A Makeover on the Menu

Wendy's sees breakfast as one avenue for growth, as its sales there have grown 13% since 2005, compared to 2% for the industry. The company launched a new breakfast menu in four markets last year. More markets will be added throughout 2011, with a target of getting the new breakfast menu in 80% of Wendy's U.S. locations by the end of the year.

Like fast-food giants McDonald's and Burger King Corp., Wendy's also has started to remodel its stores to compete with the fast-casual restaurants, with 100 locations set for a makeover this year.

Finally, Wendy's plans an extensive overseas expansion in an attempt to catch up to McDonald's and Yum! Brands Inc. (NYSE: YUM) both of which have stayed ahead of their rivals thanks to growth in countries like China.

Wendy's announced last week that it will open 50 franchises in Argentina over the next decade. Wendy's has only 340 international locations now, but wants more than 8,000, with about 40% planned for China, Brazil and Japan.

It also wants to add 1,000 locations in the United States.

Although the company has made many of the right moves, it still faces challenges in the short-term, particularly increasing commodity costs. The company said in its first quarter earnings report that it expects a 20% year-over year rise in the cost of beef.

Because it is much smaller than rivals like McDonald's, which has 31,000 locations compared to Wendy's 6,500, it's much harder for Wendy's to offset rising costs.

Still, expanding the number of locations ultimately is key to getting the company back on a growth track, and which is why the infusion of cash from the Arby's sale could be just the catalyst that Wendy's needs.

"I think that at the time we put the two brands together it was the exact right thing to do," Smith told the Associated Press, "but any business that continues to do well and perform has to be nimble and adapt to what the market is."

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