Wendy’s Might Be Too Tough for Private Equity To Swallow

Wendy’s may not have enough beef for private equity.

Last Friday, Nelson Peltz, the billionaire investor who owns 23% of the restaurant chain and its sister beef-slinger Arby’s, disclosed that an “unnamed third party” had expressed interest in partnering on a potential acquisition. The admission caused Wendy’s shares to pop more than 7 percent.

Rumors are circulating that the mystery suitor is THL Partners, is back for fast-food redemption. If case you’d forgotten, the buyout firm had a deal in February to buy CKE Restaurants, which operates Carl’s Jr. and Hardee’s restaurants, for $11.05 a share, or about $619 million. But then Apollo Management swooped in with a higher offer of $12.55 a shares, or $694 million, to seal the deal.

On Monday, any hope of a THL-Peltz combined bid got deflated, as the New York Post said Peltz just isn’t interested in partnering with any third party. Peltz, the story said, could take the company private and restructure troubled Arby’s away from the glare of public speculation. Then, Peltz could return Wendy’s to the public markets (maybe with Arby’s, if it’s running leaner).

Peltz might be the most immediate impediment to a PE play for Wendy’s, but he’s hardly the only one. First up is Arby’s, which only pulled $235.5 million sales and $17.3 million in franchise revenue for the three months ending April 4.

Next, Wendy’s doesn’t have much presence outside of the U.S., according to Buckingham Research analyst Mitch Speiser. “They don’t have many franchises internationally,” he said. “It’s probably less than one percent of profits.”

Finally, Peltz has aleady done a lot of the work that a private equity firm might try. Under his shareholding, the companies have consolidated departments, eliminated menu items and has also sought ways to incentive its managers. For example, they’ve been required to do double duty as a manager and working the floor, said Sara Senatore, an analyst with Sanford C. Bernstein.

Arby’s was already well run but was hit hard by the economic downturn of last year. Before the crash, Arby’s had EBITDA margins of 20 percent in 2007 that plunge to 14 percent in 2009. Wendy’s, because of its cost-cutting measures, saw its margins jump to 15 percent in 2009 from 11% in 2007. What’s left for a PE shop to do? They could sell stores to existing and new franchisees as a way to generate cash and shareholder value. But this won’t do much for profits.

To increase profits, any new buyer would have to boost Arby’s top line–or sales — which isn’t something PE firms are known for doing, Speiser said.

Another strategy would be to increase debt. But Wendy’s is already highly leveraged with $1.5 billion in debt, on about $507 million in cash, Senatore said. Amazingly, before all the recent rumors, Wendy’s/Arby’s was seen as an acquirer. The company took out new debt to either invest in itself or buy a rival.

“The strategies that most people would ascribe to PE are the ones [Wendy’s] already been doing,” Senatore said.