Executives at Wendy's ( WEN) have suddenly become fast friends with their most vocal agitator, Nelson Peltz. The embattled burger chain, having recently reported its worst sales performance in 18 years, on Thursday abandoned its stand against Peltz's Trian Fund and other activist shareholders. In a reversal, the fast food company said it plans to speed up the spinoff of its Tim Hortons doughnut chain, explore strategic alternatives for its Baja Fresh Mexican chain and add three of Trian's nominees to its board. The move amounts to an admission by management that its strategy is failing, or at least is a last-ditch attempt to stay in control of the company. It opens the door for Peltz's people to come in and make big changes, and it could mark the first step toward an eventual takeover. "If I'm a regular shareholder, I think Nelson Peltz is going to add value," says Howard Davidowitz, chairman of New York-based retail consultancy Davidowitz & Associates. "Wendy's has been underperforming for a long time, so it's good to see action." Shares of Wendy's recently were trading up $2.21, or 3.8%, to $60.65. Peltz sounded a reversal of his own in response to Wendy's capitulation. "We are excited that the new directors will work with the board to further enhance shareholder value at Wendy's," said Peltz in a press release. "We are now highly supportive of Wendy's management team and their initiatives, and we believe that these new board members will contribute to Wendy's plan to improve its profitability." That's a far cry of his earlier criticisms of Wendy's management via a proxy fight. In a December filing, Peltz said Wendy's plans for a partial spinoff of Tim Hortons amounted to "an attempt to avoid shining the spotlight on the poor financial performance of Wendy's business" that "would perpetuate a highly inefficient and costly conglomerate structure."
Peltz, the billionaire investor who turned around the Snapple and Arby's brands, recently acquired about 5.5% of Wendy's through his Trian fund. He is also chairman and chief executive of Triarc Cos. ( TRY), which owns Arby's and other restaurants. He and Triarc's president, Peter May, have long been revered on Wall Street as takeover artists and cash generators. Through his Trian Fund, there are signs that Peltz is on the move again. H.J. Heinz ( HNZ) announced Friday that Peltz is seeking seats on the ketchup king's board for himself and four other associates. The consumer products company said Peltz also seeks to restrict its board from making any amendments to the company's bylaws that would restrict Trian from electing its nominees. At Wendy's, Trian was joined in its quest for change by Sandell Asset Management. In response to the Peltz's campaign, Wendy's agreed to add Jerry Levin, Peter Rothschild and Stuart Oran to its board, boosting its number of directors to 15 from 12. Levin is chairman and chief executive of JW Levin Partners, a management and investment firm. Rothschild is managing member of the Daroth Capital and sits on the board of Deerfield Triarc Capital. Oran is the managing member and founder of Roxbury Capital Group. Furthermore, Wendy's said it now plans to complete the initial public offering of Tim Hortons, as well as its complete spinoff, no later than Dec. 31. Previously, the company said it would hold the IPO in late March, and then spin off the chain within nine to 18 months after the offering for tax reasons. Peltz, however, appears to have reached a compromise with the restaurant operator, since he had been calling for an immediate spinoff of the doughnut chain. Investors are enthusiastic about the Tim Hortons IPO, as the chain has a fanatical following in its native Canada and the restaurant IPO market has shown strong signs of life lately. The recent IPO for McDonald's ( MCD) burrito chain, Chipotle's Mexican Grill ( CMG), set the bar for Wall Street's biggest opening-day gain for a U.S. IPO since late 2000.
Wendy's pledged to look at options to return excess cash to shareholders following the Tim Hortons IPO, including share repurchases and dividends. Investors expect the company's new directors to be aggressive advocates for such moves. Peltz also has called for a spinoff of its Baja Fresh Mexican chain, whose sub-par performance has dogged Wendy's since it acquired the chain in 2002. "It's going to try to sell the Baja chain, and it might actually get a decent price for it, because of the way the market is viewing these things now," Davidowitz says. "Mexican food is very popular. Also, people are looking at what Dunkin Donuts sold for, which was beyond all imagination. Then, everyone watched the Chipotle offering go off the charts, so fast food business is a very hot business if you get it right." Three private equity firms agreed to buy Dunkin' Donuts for $2.4 billion in December. Meanwhile, there's no guarantee that this latest development at Wendy's will be the end of shareholder activism at the company. Last July, the company bowed under pressure from Pershing Square Capital, a hedge fund run by Bill Ackman -- the investor who recently made headlines with his call for structural changes at McDonald's. At the time, Wendy's agreed to raise its dividend, expand its share repurchasing plan, sell off underperforming real estate and spin off Tim Hortons. Not long after Ackman scored his win at Wendy's, Peltz got into the game. Aside from nagging investors, Wendy's has had plenty of other problems. It's been short of an effective marketing message since its founder and longtime public face, Dave Thomas, died in 2002. Last year, a Nevada couple planted a human finger in a bowl of Wendy's chili in a much-publicized attempt to bilk the company. The couple eventually pled guilty to fraud charges, but Wendy's still lost millions in sales.
Meanwhile, fast-food competitors like McDonald's, Yum! Brands ( YUM) and Burger King have moved onto its turf. As for its fundamentals, Peltz noted in his recent filing that Wendy's company-owned stores have recorded average profit margins of about 10%, compared with the industry standard of about 20%. Also, the company has spent $1.3 billion on the business over the last six years while its operating income has declined. Davidowitz says Peltz may have an aggressive restructuring in mind for Wendy's that would shrink the size of the company. "I think he wants to close a whole bunch of stores, slash the cost structure and manage the capital like crazy," Davidowitz says. "Once he gets the situation under control, he'll look to sell it three or four years down the road."