Wendy's and Arby's Break Up - Analyst Blog

Wendy's/Arby's Group Inc. (WEN) recently sold Arby's to Atlanta-based private equity firm Roark Capital Group for $430 million. Post-split, Wendy's/Arby's Group will receive approximately $130 million in cash and retain an ownership interest in the Arby's business of 18.5%, which translates to approximately $30 million.

The buyer will assume approximately $190 million of Arby's-related debt, consisting primarily of capital lease and sale-leaseback obligations. The rest of the amount will come to Wendy's/Arby's Group in the form of an income tax benefit, which it will realize over the next few years. The deal is expected to close early in the third quarter of 2011. The Group will report Arby's as a discontinued operation in its second quarter results.

In January, Wendy's/Arby's Group planned to sell its Arby's restaurants to focus on strengthening the Wendy's brand. UBS Investment Bank, an arm of UBS AG (UBS) was the Group's financial advisor for the divestiture process. Wendy's/Arby's had shaped up back in 2008 with the merger of Triarc, the franchisor of Arby's restaurant chain, and Wendy's, the owner-operator-franchisor of the eponymous fast food chain.

Arby's new family, Roark Capital Group, has a proven track record of being an investor and value-added partner with expertise in franchise and restaurant sectors. Its present franchise/multi-unit portfolio includes companies like Auntie Anne's, Batteries Plus, Carvel Ice Cream, Cinnabon, Corner Bakery, Fast Signs, Il Fornaio and McAlister's Deli.

Despite a portfolio of 3,631 restaurants, Arby's had failed to perform during the U.S. economic downturn largely due to its lack of international exposure. Nevertheless, signs of stabilization at Arby's with its North America company-operated and franchised same-store sales increasing a respective 6.8% and 4.8% during the first quarter of 2011 should be encouraging for Roark Capital.  

Wendy's/Arby's Group, on the other hand, sees higher growth opportunities from Wendy's that has 6,565 restaurants in more than 20 countries. The company is also exercising initiatives like value menu offerings, remodeling, introduction of new dayparts and setting up of new units globally to drive traffic and improve same-store sales at Wendy's. The divesture will help Wendy's to further increase its earnings and deleverage its balance sheet.

Wendy's is not the only fast food chain looking to vend slower growth brands. Yum! Brands Inc. (YUM) is also planning to sell its slow moving Long John Silver's and A&W brands to concentrate more on its star performers like KFC, Pizza Hut and Taco Bell.

In recent past, sell-offs and acquisitions gained momentum in restaurant industry as these are a long-term strategy to strengthen financial flexibility. Big names like Burger King Holdings and California Pizza Kitchen Inc. (CPKI) have also walked this path.

Last year, Burger King was acquired by a private investment firm 3G Capital for $4 billion. Last month, California Pizza Kitchen also agreed to come under the wings of Golden Gate Capital for approximately $470 million or $18.50 per share in cash. The deal is yet to close.

Wendy's/Arby's Group currently retains a Zacks #3 Rank (short-term Hold rating). We are also maintaining our long-term Neutral recommendation on the stock.