Arby’s, the 3,700-unit chain that is under strategic review by parent company Wendy’s/Arby’s Group Inc., may fetch a price tag of more than $300 million, according to a few securities analysts who cover the company.
Atlanta-based Wendy’s/Arby’s Group announced Thursday it was exploring options for Arby’s, including a possible sale, less than three years after a $2.3 billion merger with 6,600-unit Wendy’s created the merged company.
Most observers viewed the news as a positive step for Wendy’s/Arby’s, which could regain focus on the Wendy’s brand, helping it to drive growth in the U.S. and international markets and continued menu changes aimed at driving consumer traffic.
Arby’s had faltered during the past few years, and Wendy’s/Arby’s has been unable to complete a turnaround for the brand best known for its roast beef sandwiches.
“We view today’s announcement Wendy’s is exploring strategic alternatives for Arby’s, including a sale, as a positive catalyst for shares,” John Glass, restaurant analyst for Morgan Stanley, wrote in a research note. “We believe the legacy Arby’s business, which came with the merger and has been a chronic underperformer, was both a distraction for management and a deterrent to potential shareholders. While it is unclear if a sale would be accretive to earnings … the transaction could improve margins and returns at the parent company.”
A handful of analysts targeted differing possible deal prices for Arby’s – should a sales be made – depending on real estate, debt, and what possible suitors see as realistic sales output for the brand.
Glass estimated that Arby’s could produce earnings before interest, taxes, depreciation and amortization, or EBITDA, of about $50 million this year, and pegged a possible transaction ranging from five to eight times earnings, which would create a price of between $250 million and $400 million.
“Of course, seeking to sell Arby’s does not mean this is a done deal,” Glass wrote. “We think buyers may be price-sensitive given the brand’s history.”
Jeffrey Bernstein of Barclays Capital said in a research note that the sale of Arby’s could garner about $300 million.
Bernstein noted that since the 2008 merger of Wendy’s International and Arby’s parent Triarc Cos., led by investor Nelson Peltz, Wendy’s reaped most of the efficiency gains. Wendy’s store-level margin improvements contributed about $100 million in incremental EBITDA, and the combined company produced about $60 million in savings for general and administrative costs.
“On the flip side, the Arby’s brand has struggled over the same period,” he wrote, “with comps falling double digits for much of that time due primarily to lack of value offerings and intense competitive pressures in the sandwich segment.”
Peltz had said in a statement Thursday that Arby’s is expected to post its first positive same-store sales figure since 2007, a 3.1-percent increase in the fourth quarter of fiscal 2010. Wendy’s/Arby’s will release those figures Jan. 26.
Another securities analyst, Larry Miller of RBC Capital Markets, estimated Arby’s selling for six times EBITDA, which his firm pegged closer to $100 million, yielding a $600 million sale price.
Wendy’s future
Despite the future for Arby’s, Peltz and Wendy’s/Arby’s chief executive Roland Smith both mentioned in statements regarding the strategic review that Wendy’s was well-positioned to grow incremental sales through new menu items and dayparts. Expansion in North America and internationally will also be a goal.
Darren Tristano, executive vice president of Chicago-based industry research firm Technomic, agreed that Wendy’s has room to grow still in North America, meaning mostly new opportunities in Canada and Mexico, and is well-positioned for a push into international markets.
“We’ve seen a lot of very strong performance from Yum and other brands in China and Europe, and that’s where the growth in our industry is going to go when the American economy is still struggling,” he said. “Our brands are very well-perceived by other countries. Wendy’s went into the European market and then came out of it a few years ago, but we’re learning as an industry how to grow internationally.”
Tristano said Wendy’s has shown before that shedding secondary brands allows it to get back on track, citing the divestitures of Tim Hortons and Baja Fresh in 2006, moves that Peltz recommended when he first took a minority stake in Wendy’s.
“We’re seeing that chains want to build and maintain their focus on their core business, and having a big portfolio isn’t always the best thing for the company,” Tristano said. “Internally, Wendy’s and Arby’s operated as different brands with different cultures, but they didn’t integrate to the level of a success story like Applebee’s and IHOP. There, Julia Stewart brought people together, and she saved some money. Wendy’s/Arby’s didn’t recognize those efficiencies.”
As standalone brands, Wendy’s and Arby’s may have initiatives that can sustain recent sales momentum, Tristano added.
“Wendy’s is doing a great job with their new fries seasoned with sea salt,” he said. “It’s similar to Domino’s new formula of pizza. Whether it’s better or not, the advertising for the product is going to draw traffic.”
Arby’s $1 Value Menu, introduced last year, will drive traffic in the near term and over the long run, he added, though it would bring the usual margin pressures common to any value offering.
Wendy’s/Arby’s combined system operates or franchises more than 10,000 restaurants in the United States and 24 international markets.
Contact Mark Brandau at [email protected].
