Wendy’s Flush After Selling Inspire Brands Stake
Wendy’s has quite a windfall in the bank after selling its ownership stake in Inspire Brands.
The ownership stake came out of the ownership shell game during the Great Recession. Nelson Peltz, Wendy’s chairman, bought the struggling burger giant in 2008 for $2.3 billion via the beverage giant Triarc Companies, which already owned Arby’s. The deal created the Wendy’s/Arby’s Group. The group then sold Arby’s to Roark Capital in 2011, retaining an 18.5 percent stake in the company worth about $30 million. After Arby’s, R Taco and Buffalo Wild Wings merged under the Inspire Brands umbrella, the ownership stake converted to the parent company and was diluted to 12.3 percent.
Growth from $30 million to $450 million ($335 million after taxes) is quite a nice return on investment (and values Inspire Brands at $3.6 billion). We know $100 million will go toward repurchasing shares according to Wendy’s, but the remaining $235 million is a big question mark.
Wendy’s CEO Todd Penegor said it would go toward future growth beyond the share repurchasing.
"The opportunity to monetize our investment in Inspire Brands will allow us to invest in future growth for the Wendy's brand and company, which is our top priority,” said Penegor in a press release.
Stifel analyst Chris O’Cull expanded on the options, saying there is a lot a company like Wendy’s can do with an extra couple hundred million dollars. It could invest in higher quality food to better fight competition, or invest in technology to efficiently push growth. It could also use the cash to cushion a discount for franchisees to spur growth or the ongoing “Image Activation” remodel program. O’Cull noted there is already a royalty discount program for operators who update, and the company has talked about accelerating that program.
“We point out as of 2017, roughly 43 percent of the global system had been re-imaged (46 percent as of 2Q18), and prior plans entailed touching an additional 10 percent of restaurants annually moving forward,” wrote O’Cull.
But the windfall could also mean getting into the M&A game. According to the Wall Street rumor mill, Wendy’s and Papa John’s were in talks about a merger or acquisition before scandal struck. And given the incredible 1,400 percent return seen in this deal, the Wendy’s leadership team probably has a soft spot for such activity.
To ponder exactly which brand might be a target is a fool’s errand, but if Wendy’s was in talks with Papa John’s (a company valued at $2.2 billion with annual sales of more than $400 million) that means there are a lot of similarly and lesser-valued companies public and private in the mix.