(Wendy's/Arby's sale to private-equity group Roark Capital Group report updated with further analysis and background.)
NEW YORK (TheStreet) -- Wendy's/Arby's (WEN) - Get Wendy's Company Report sale of its struggling Arby's chain to private-equity group Roark Capital Group shows that the fast-food restaurant operator is looking to deleverage its balance sheet and finally divest a brand that's been dragging on its financials for years.
Since the Arby's brand has been underperforming, any acquirer would be looking at the company as a turnaround story, Scott Rostan, principal and founder of
Training The Street
earlier this spring.
The deal did not come as a surprise as Wendy's/Arby's has said it was looking for strategic alternatives for Arby's, which has trailed Wendy's performance. Wendy's/Arby's Chairman Nelson Peltz had previously received an oral inquiry from an unnamed third party, according to a June 2010 filing with the
Securities and Exchange Commission
The merger of Wendy's and Arby's occurred in 2008 under Peltz's leadership, and the company has tried to reinvigorate the brand -- most recently with a new advertising campaign labeling Arby's menu as "good mood food" -- but a meaningful turnaround has yet to materialize.
Some efforts have paid off; in its recent quarterly report, Wendy's/Arby's said that same-store sales -- or sales at stores open at least one year, a closely watched metric in the restaurant industry -- jumped 5.5% at Arby's, while ticking up just a 0.3% at its namesake Wendy's restaurants.
Even so, Rostan suggested that investors should think separately about Wendy's, a well-respected burger chain, and Arby's, an underperformer. He expected that Arby's would be targeted by private-equity firms, noting that it previously had private-equity ownership.
"This is definitely a risk," Telsey Advisory Group restaurant analyst Peter Saleh told
. Roark is "taking on a brand that needs some capital behind it and needs some help."
Since the Arby's brand has been underperforming, any acquirer would still be looking at the company as a turnaround story, Rostan said.
"You just have a lot more competition from the fast-casual space and from
," Saleh said.
Roark certainly faces headwinds as it takes on the Arby's brand, perhaps most notably in the area of rising ingredient costs which have hit a roster of food and beverage companies across the sector from
Jack in the Box
Leveraged buyouts of
in 2010 indicate that "private equity's appetite for restaurant operators
is unlikely to subside in 2011 given long-term franchise agreements and strong cash flow profiles," Morningstar analyst R. J. Hottovy said earlier this year.
In late May,
agreed to sell itself to private-equity firm
Golden Gate Capital
, underscoring a growing trend of corporate dealmaking in the restaurant and consumer stock sector.
that Roark Capital Group would acquire Arby's in deal that values the sandwich chain at $430 million.
M&A has been staging a comeback in 2011 after hitting a six-year low in 2009.
Under the terms of the deal, Wendy's/Arby's will retain an 18.5% stake in Arby's, which has more than 3,600 restaurants systemwide. Wendy's will receive $130 million in cash at the closing of the deal; its 18.5% stake is expected to be valued at around $30 million.
Atlanta-based Roark Capital Group will assume around $190 million in debt related to the Arby's chain, which mainly consists of capital lease and sale-leaseback obligations.
Wendy's/Arby's expects to realize an income tax benefit of around $80 million over the next few years.
The deal is expected to close early in the third quarter.
Shares of Wendy's/Arby's jumped 3.5% in morning trading Monday to $4.68.
-- Written by Miriam Marcus Reimer in New York.
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