One of Wendy's Largest Franchisees Joins Bid to Buy Wendy's

Greg Flynn already writes royalty checks to Wendy's. If a bid filed Wednesday succeeds, he will also help decide what those checks pay for.

A group led by Nelson Peltz's Trian Fund Management offered $7.35 a share in cash to take Wendy's private, valuing the burger chain at about $1.4 billion, according to a regulatory filing reported by Reuters on Oct. 28. The price is roughly a 20% premium to Tuesday's close. Trian and related parties already own 16.3% of the company. Its partners are investment firms BlueFive Capital and Sixth Street Partners, plus Flynn Group, which Reuters said operates more than 340 Wendy's restaurants and is the brand's master franchisee in Australia and New Zealand.

Wendy's confirmed the proposal and said a committee of independent directors would evaluate it, with no assurance that a deal or any other strategic outcome will follow. That committee was formed in February, after an earlier Trian filing, according to CNBC.

The investors' pitch is about time. "We believe private ownership is the better path and provides the patient, long-duration capital needed to restore the business and the franchise system to a position of strength," the group wrote to the board. In the letter, Peltz and Flynn said the business "requires significant capital investment to de-lever and execute the strategic initiatives needed to turn system performance around." Wendy's carried roughly $2.4 billion of net debt as of June 28, Reuters reported.

The case for patience rests on a rough stretch. Wendy's has reported six straight quarters of same-store sales declines, and its stock has fallen 65% over two years, CNBC reported. The company withdrew its annual forecast in August, and CEO Bob Wright said at the time, "We are not performing in our potential." TD Cowen analyst Andrew Charles wrote that a take-private "makes sense as Wendy's turnaround is likely to be prolonged."

The franchisee in the consortium is what makes this unusual. In a mostly franchised system, the franchisor sets royalty rates, remodel requirements, ad fund contributions and development terms. A parent company partly owned by one of its largest operators would make those calls with an operator's view of unit economics, which some franchisees may welcome. It would also invite questions about how that parent treats every other franchisee. Franchise Herald noted that Flynn Group also runs Arby's restaurants, a direct burger competitor.

Strain inside the system is already public. Meritage Hospitality Group, which operates 314 Wendy's restaurants, filed for bankruptcy last month after the chain tried to terminate its franchise agreement, the Associated Press reported. We have followed the fight over which Meritage stores close and a buyer lining up 42 of them. The patient capital argument is also spreading among big operators: Green Shoot Brands rebranded this month around evergreen money with no fund clock attached.

Wendy's reports third-quarter results Nov. 5, the first time management will face analysts with the offer on the table.