Monday, June 27, 2011

WHAT DOES THE FUTURE HOLD FOR ARBY’S, WENDY’S?

JUN 15, 2011 12:31 PM, BY MARK BRANDAU, NATION'S RESTAURANT NEWS ASSOCIATE EDITOR
The $430 million sale of Arby’s Restaurant Group Inc. to Roark Capital could be qualified as addition by subtraction for both the 3,600-unit Arby’s and its former sister chain, the 6,600-unit Wendy’s.
Restaurant securities analysts noted that the terms of the brands’ separation — with Arby’s leaving parent company Wendy’s/Arby’s Group Inc., and Wendy’s remaining — represented a fair value for Arby’s and will allow both chains to go their own ways with fresh infusions of cash.
Atlanta-based Wendy’s/Arby’s Group now can focus solely on Wendy’s growth initiatives, a goal that company executives said motivated the January announcement that Wendy’s/Arby’s Group would seek strategic alternatives for Arby’s. Areas of focus for Wendy’s will include its test of a new breakfast platform, currently in six markets, with a goal of being in 1,000 stores by year-end; expanding internationally to as many as 8,000 locations; and adding as many as 1,000 domestic stores over the next few years, while remodeling many units along the way.
As part of the deal announced Monday, Roark Capital will pay Wendy’s/Arby’s Group $130 million in cash and assume $190 million in Arby’s-related debt. Wendy’s/Arby’s Group also will receive an $80 million tax benefit. The company also retains an 18.5-percent stake in Arby’s, valued at $30 million, letting it still reap any of the upside should Roark successfully turn around the sandwich chain’s business.
As for Arby’s, Roark has announced that it would spend $180 million at the start of the deal, with $130 million going to Wendy’s/Arby’s Group to pay the cash portion of the purchase price and the remaining $50 million earmarked for liquidity and growth capital for the sandwich chain. Roark officials said the private-equity firm would invest an additional $50 million through 2013 to fund more growth opportunities.

Wendy’s gets a cleaner balance sheet

As Wendy’s attempts to grow a significant presence internationally and realize its remaining potential in the United States, the brand should have a healthier balance sheet to do so. The sale’s $130 million cash proceeds and the assumption of $190 million in debt by Roark Capital represents a $320 million swing in Wendy’s net debt-to-earnings ratio.
Though the company would have to forgo Arby’s trailing-12-month earnings before interest, taxes, depreciation and amortization, or EBITDA, of $53 million, Wendy’s/Arby’s Group’s debt would fall to 2.2 times EBITDA. The presale ratio is 2.7 debt-to-EBITDA. Following the close of the sale, Wendy’s/Arby’s Group would have $630 million on hand.
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