Will Triarc Save Wendy's?

Investors hope the struggling fast-food chain will improve after agreeing to be acquired by the owner of Arby's

Wendy's International's (WEN) disappointing earnings news was overshadowed by a deal with Triarc (TRY), franchisor of Arby's, to purchase the struggling fast-food company in an all-stock deal worth $2.34 billion. It marks the end of a nearly two-and-a-half year campaign by Nelson Peltz, who owns 10% of the company through his ownership of Trian Partners, to force a turnaround at the struggling hamburger joint.

The deal news pushed Wendy's shares up 4.2% to 26.39, while Triac shares rose 2.7% to 6.47 on Apr. 24.

Wendy's earnings only reinforced the image of an underperforming brand. The company reported first quarter earnings from continuing operations of $8.4 million, or 10 cents per share, well below the First Call consensus estimate of 17 cents and year-ago results of $15.1 million and 16 cents, respectively. It was hurt by higher breakfast costs, lower-than-expected sales and rising commodity prices. Previously reported first-quarter same store sales at U.S. company-operated restaurants fell 1.6%, compared to a rise of 3.8% a year ago.

Wendy's has been struggling for several years. It has failed to keep up with trends in the industry, such as boosting growth by focusing on breakfast and value menus. For example, last summer, while McDonald's (MCD) focused on making its franchises a convenient stop on the morning commute with its new and improved coffee, Wendy's served breakfast at only 500 of its 6,000-plus franchises.

After Wendy's founder Dave Thomas died in 2002, Wendy's has suffered from an identity crisis. Thomas appeared in over 800 commercials between 1989 and 2002. But without Thomas, Wendy's ad campaigns have been lackluster at best, especially compared to McDonald's and Burger King's (BKC) contemporaneous ads. Yet another campaign fizzled in January when Wendy's replaced "That's Right," which had failed to boost sales, with "Waaaay Better Than Fast Food."

"The company almost had to decide what they wanted to be from scratch," said UBS analyst David Palmer. "They seem to be switching from campaign to campaign."

Over the last 12 months, Wendy's has existed in a state of suspended animation as the Special Committee of Wendy's Board, formed to look into how to best right the struggling company, sought out alternatives. Ultimately, it decided to sell the company to Triarc.

"We believe this transaction with Triarc is in the best interests of all of Wendy's constituencies and represents superior value to what the Board anticipates Wendy's would have generated as an independent company," Wendy's Chairman James Pickett said in a press release.

In a joint press release, Triarc and Wendy's said that the deal should be completed during the second half of 2008, pending shareholder approval. With Peltz and his partner Peter May owning over 35% of Triarc and their investment company Trian holding 10% of Wendy's, approval appears to be little more than a formality.

Now it's Triarc's turn to see if they can turn Wendy's around. Restoring the luster to Wendy's brand should be first and foremost for Peltz and Triarc, UBS' Palmer said. "[It would be] helpful to them if they made their restaurants as high end as people perceive their food to be."

Changes in how the company is managed may also reduce costs across the board. Operating improvements could lead to $100 million in annual savings; combining operations another $60 million. Profit margins, which have been falling, also need to be brought up to the levels of other fast food restaurants.

"Wendy's may have lost its way a little bit since Dave Thomas died," said Morningstar analyst John Owens. "If Peltz puts a plan that the franchisees can get behind, I think the prospects [for a turnaround] are good."

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