Wendy's International: Acquisition Unlikely For Now

About a month ago, our analyst colleague Mark Basham form Standard & Poor's reiterated his sell rating primarily because he thought that Wendy's (WEN) would have trouble meeting its 3-4% 2007 same-store sales increase. The conclusion was based on the fact that the first quarter comparison was 3.7% however the first quarter should have been much higher as it was the easiest quarter to beat from last year. Once we get into the second half of 2007, WEN is going to have a tougher time beating the 2006 figures. S&P reiterated its $26.00 target price.

As of February 2007, the CrossProfit EOL 01/08 is $31.40. Estimated 2007 EPS is $1.18. Currently shares are trading near the $40.00 mark. Current pricing is based on unconfirmed acquisition rumors.

After reporting Q1 earnings (see conference call transcript), WEN formed a special committee to explore strategic options. As far as we know, they have not hired anyone though GS might be in the running should it come to this. Forming a special committee is not the same as hiring Goldman Sachs to investigate strategic options.

What really got this rumor going was a report in StreetAccount.com that WEN had received a $50 per share offer and called it "unconfirmed speculation". This is beginning to sound like a New York Post page six item.

First of all the WEN board formed the special committee in response to Q1 sales and earnings. This is more likely to be along the lines of which coffee to introduce and where rather than 'let's sell the company'. Second, an investment banker was not hired, which would indicate that WEN is actively looking to be acquired. Third, when an offer has actually been made, the normal response is a confirmation without disclosing the identity of the acquirer. Companies are careful about this in order to avoid potential law suits. WEN issued a standard no comment reply.

Last but not least is the alleged price tag. WEN Directors; if anyone offers $50 a share, grab it immediately.

You can always tell when a rumor is nothing more than a rumor when the price can not possibly be. Had the rumor been for 40, this would be in the realm of nuts yet possible. If a private equity firm buys WEN at 50, they will be sued for negligence by their constituents. The highest analyst worksheet buyout figures are below 40 and the one worksheet that we saw was stretching it a bit. The mid 30's are a more likely acquisition value. Above current prices, WEN is a short.

Three percent annual growth just doesn't cut it in the markets these days.

WEN 1-yr chart

Disclosure: CrossProfit consensus, no conflicts.