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Wendy's: Is a Buyout on the Menu?

Shares zoomed higher Thursday after the fast food chain said it's considering putting itself up for sale

The fast-food chain Wendy's International (WEN) is thinking about putting itself up for sale, in the latest example of a company expressing such willingness in public while a shareholder agitates for change. The shares soared on the news on Apr. 26.

The Dublin (Ohio) company has formed a special committee of independent directors to investigate "all strategic options for Wendy's", including a possible sale. "There is no specific timeframe to complete the review and there are no constraints on options to be explored by the committee," said Chairman of the Board James V. Pickett, who will lead the committee, in a press release late Apr. 25. "A number of stakeholders have offered suggestions about strategies to improve performance and create additional value."

Despite the lack of clarity about what happens next, investor speculation drove Wendy's stock price up by 14.7% to $37.495 per share in early afternoon trading on the New York Stock Exchange Apr. 26.

"We think a buyout is unlikely, given the large premium at which WEN shares trade to peers," Standard & Poor's Corp. analyst Mark Basham said in a research note. (S&P, like, is owned by The McGraw-Hill Companies.) When you divide Wendy's stock price by the company's earnings, the ratio comes out at 40. In contrast, its rival the fast-food giant McDonald's (MCD) has a price-to-earnings ratio of 16. Basham thinks Wendy's could still fend off a hostile acquisition by taking on as much as $2 billion additional debt to buy back stock and pay a special dividend - a move that would make the company a less attractive takeover target.

Nelson Peltz's investment firm Trian Partners, which holds a 7% stake in the company, had pushed for the exit of the company's decades-long CEO Jack Schuessler, who resigned in April, 2006. Trian also nominated three new directors to the company's board, according to Morningstar. "We do believe that management and the board have a decent record of doing right by shareholders, but disapprove of the company's staggered board, poison pill, and other takeover defenses," Morningstar analyst John Owens said in a research note.

Meanwhile Wendy's new CEO Kerrii Anderson has been trying to boost flagging sales. In April, 2006, for example, Wendy’s introduced the Frescata sandwiches -- a line of deli sandwiches such as "Roasted Turkey with Basil Pesto" or "Black Forest Ham & Swiss". Such efforts have helped to boost Wendy's sales to $522.9 million during the quarter ended Mar. 31, up by nearly 2% compared to the same period last year. But Wendy's net income fell 71% year over year to $14.7 million during the March quarter, as the company struggled with challenges like the high cost of beef and tough competition.

At least one other fast food chain has gone the private equity route. Back in 2003, Wendy's other main rival Burger King was taken private for $1.5 billion by a group including Texas Pacific Group, Bain Capital Partners, and Goldman Sachs. The group then sold shares in a May 2006 IPO, raising $425 million according to Thomson Financial. The private-equity buyers retained a majority stake in Burger King. With Wendy's apparently on the buyout menu, perhaps other private-equity players are ready to place their orders.

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