Is Tw Ready To Cook Up Some Savory Results?

One of the nation's largest food-service companies is TW Holdings, with $3.6 billion in annual revenues from its Hardee's, Denny's, and Quincy's roadhouses and Canteen institutional hash-slinging operation. But its primary distinction can be summed up in a word: debt. TW was the object of a 1989 leveraged buyout by Coniston Partners and Donaldson Lufkin & Jenrette. At yearend 1991, TW carried on its books $2.3 billion of long-term debt vs. $77 million in shareholder equity.

But TW's balance sheet has been rejuvenated, and some smart investors are wagering on the company. In June, LBO giant Kohlberg, Kravis, Roberts engineered a recapitalization, under which TW bought back its junkiest high-coupon debt, and KKR wound up with a 47% stake in the company. True, the hoi polloi on the Street were unimpressed. Share prices of TW common stock--the publicly traded "stub" left over from the LBO--have gone nowhere (chart). But one savvy fund manager predicts a rebound is under way. "There's no question that TW Holdings has turned the corner," notes Eric E. Ryback, manager of the Lindner Dividend mutual fund and co-manager of its sister Lindner mutual fund. Ryback expects the company to rejigger its balance sheet still further in the coming weeks. "The refinancing is going to trigger a chain of positive events, probably including the refinancing of some of its bank debt," says Ryback. That, he feels, will give the company a shot of adrenaline.

`PAID TO WAIT.' For Ryback, the TW investment vehicle of choice is not the common but rather the preferred shares that were issued in June as part of the KKR deal. The preferred was issued at $25 a share and now sells for $28. It is convertible into 6.79 shares of TW's NASDAQ-traded common stock. That works out to $4.12 a share--slightly over the common's current price. But the common pays no dividend, while the preferred pays $2.25 annually--an attractive 8.1% yield. Ryback has bought 400,000 preferred shares for Lindner Dividend, noting that it offers "upside potential, and meanwhile you're being paid to wait."

How long a wait? The conventional wisdom is dour. Analysts' estimates average a 43 cents-per-share loss in 1992 and a 9 cents-per-share loss in 1993. But Ryback believes TW is on the verge of showing profits, perhaps 10 a share in '93. "KKR is controversial, but don't forget that it has had a string of positive investments," notes Ryback. The TW preferred gives investors a fairly high-yielding way of finding out if the old KKR magic still works.

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