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UPDATED: Triarc wins quest for Wendy’s

DUBLIN Ohio Wendy’s International Inc. has agreed to be acquired by Arby’s parent Triarc Cos. in a stock swap valued at $2.34 billion, ending a year of speculation about the burger giant’s fate. Triarc, the most visible holding of activist investor and longtime Wendy’s antagonist Nelson Peltz, has agreed to swap 4.25 shares of its class “A” common stock for each share of Wendy’s.

In announcing the deal Thursday morning, the parties said that Arby’s and Wendy’s would continue to operate as autonomous brands. But Triarc indicated that Wendy’s chief executive officer Kerrii Anderson would be succeeded in that role by Roland Smith, the acquiring company’s CEO. The deal is expected to close in the second half of this year.

“Working together with Wendy’s team, we expect to improve margins significantly at Wendy’s company-owned stores,” Smith said in a prepared statement. “We also expect to drive significant synergies and improve efficiency, resulting in substantial annual savings.” The statement estimated that the savings would eventually reach $60 million annually. In addition, planned improvements to Wendy’s corporate-store food, labor and operating cost structures were estimated to generate $100 million of annual incremental operating profit “over time.”

The announcement indicated that the combined company—to be renamed with “Wendy’s” as part of the new corporate identification—would focus on breakfast, snacks, late-night traffic, global expansion, new store development and future acquisitions. It also cited the possibility of co-branding Arby’s and Wendy’s outlets.

The parties said the deal would create a quick-service empire that operates or holds the franchise rights to 10,000 restaurants generating $12.5 billion in dual-system sales. About 3,700 of those units are Arby’s sandwich shops, and the remainder are franchised or corporately run Wendy’s hamburger outlets.

The Associated Press quoted Pam Thomas Farber, the daughter of Wendy’s founder and longtime spokesman Dave Thomas, as saying her father “would not be amused” by the acquisition. “It’s a very sad day for Wendy’s and our family. We just didn’t think this would be the outcome,” Farber told the news service.

Triarc shares closed at $6.30 on Wednesday, which according to terms of the stock swap would create a value of $26.78 to Wendy’s shares, a 5.7-percent premium to their closing price of $25.32 on Wednesday. Wendy’s has about 88.3 million shares outstanding, creating a deal value of about $2.34 billion. Securities analyst David Palmer at UBS Equity Research in New York said that value is about 8.4 times Wendy’s projected enterprise value to earnings before interest, tax, depreciation and amortization.

Last summer, when Wendy’s first began exploring sale options and shareholder Peltz made public his interest in the chain, Peltz had offered up to $3.6 billion for Wendy’s, or as much as $41 per share. Wendy’s stock had hit a high after that offer, of $42.22 per share. Months later, in November of last year, as the credit markets crumbled and Wendy’s performance continued to decline, Peltz reduced his offer to an undisclosed amount.

Just last week, Wendy’s had rejected a merger with Triarc and an offer to be acquired by the rival company and its affiliates for $900 million in cash plus stock, prompting longtime Peltz partner Peter May to demand a special meeting of Wendy’s shareholders. The Wall Street Journal reported that Wendy's board was leaning over the weekend toward selling a piece of the company to a private-equity company, Kelso & Co., which would have then appointed longtime Wendy's franchisee David Karam as CEO. The Journal, quoting anonymous sources, said that move was favored by franchisees. But Peltz and his partners came back with a deal that trumped the Kelso offer.

The current deal, approved by both Wendy’s and Triarc’s boards of directors, is subject to the approval of Triarc shareholders, who must approve a bylaw change that would convert each class “B” common share into one share of class “A” common. After the deal is completed, the post-merger company would thereby have a single class of common stock.

Wendy’s announced almost exactly a year ago that it would explore a sale, recapitalization or other strategic alternative. Since that time, Peltz and his various investment holdings have surfaced repeatedly as suitors. Other parties who declared themselves interested included several groups led by Wendy’s franchisees.

Since the beginning of Wendy’s review, the chain has been challenged by slower sales than its surging competitors McDonald’s and Burger King. Wendy’s has struggled to create sales-driving products and to take advantage of the breakfast daypart, like McDonald’s has done. Today, about 1,000 units in the Wendy’s system serve breakfast.

The No. 3 burger chain also has had trouble finding an advertising campaign as successful as that of Dave Thomas himself, who would pitch the chain’s square-shaped and never-frozen hamburger patties. In January, Wendy’s changed gears from the “Red Wig” campaign, which featured a man in a red, pig-tailed wig that harkened the iconic Wendy’s character. That campaign was met with mixed reviews from both franchisees and marketing experts. Today, Wendy’s is pitching its products with a slogan, “It’s waaaay better than fast food. It’s Wendy’s!”

On the heels of the merger announcement Thursday, Wendy’s also reported a first-quarter earnings nosedive, which it blamed on “several unusual items.”

Net income for the quarter ended March 30 totaled $4.1 million, or 5 cents a share, down 71.8 percent from year-ago earnings of $14.7 million, or 15 cents a share. Excluding expenses related to the company’s review and restructuring charges in both this year and last year’s first quarters, net income would have totaled $8.4 million, or 10 cents a share, in the latest quarter, compared with $15.1 million, or 16 cents a share, a year ago.

One-time items in the latest-quarter included breakfast daypart investments of $4.2 million, higher legal fees and reserves of $1.6 million, higher franchisee incentives of $1.3 million and higher convention costs of $0.6 million, the company said.

Revenues declined 1.4 percent to $582 million. As previously reported, first-quarter domestic same-store sales fell 0.1 percent at franchised units, compared to a 3.7 percent increase in the first quarter of 2007. First-quarter same-store sales at company-operated restaurants fell 1.6 percent, compared to a 3.8 percent incase in last year’s first quarter. Wendy’s current chief executive, Anderson, predicted improved same-store sales for April, currently running at positive year-to-year, due to the recent launch of several new products like its Chicken Go Wrap and its new advertising.

Wendy’s board approved a quarterly dividend of 12.5 cents per share, payable May 19, representing the company’s 121st consecutive quarterly dividend. The company will not hold its previously scheduled conference call because of the merger announcement.

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