Tim Horton's Spinoff Was Healthy For Wendy's Investors

Todd Sullivan of the blog Valueplays makes the argument in this post that the spin-off of Tim Horton's from Wendy's destroyed value in the core Wendy's franchise. Aside from ignoring and/or mis-stating key facts (Bill Ackman is indeed a long term value investor, and Nelson Peltz, who still holds Wendy's shares, also pushed for the THI spin-off), I think the argument is off-base.

Spin-offs create value by splitting two or more operations that don't necessarily need to be connected to each other. The resulting entities are more focused, have management that is better incentivized, and in many cases are also more apt to get bought out, than the original conglomerate. Now, is there a good reason for Tim Horton's to be locked up in the same mismanaged entity that is Wendy's? Sullivan's argument is that Wendy's could be doing much better if it only sold coffee to its customers, as McDonald's seems to be succeeding in doing. My retort: Can't Wendy's sell coffee without THI just as it could with THI? What in the world does Tim Horton's have to do with Wendy's selling coffee?

I would argue that if the spin-off of THI never happened, then Wendy's would still be basking in the glory of its well-run THI operation and not focusing on its mismanaged core business. Now that THI exists (and is thriving) on its own, everyone can see how badly Wendy's is lagging behind McDonald's and Burger King. With this transparency comes shareholder pressure to improve operations. If the THI spin-off never happened, it never would have been so painfully obvious how badly Wendy's is managed. With the transparency of the spin-off comes a recognition of problems. While the solutions may not be easy, recognition is the first step.

Now, shareholders can decide to own either Wendy's or Tim Horton's or both. As a shareholder of Wendy's, you would've received your fair share of THI in the spin-off. You can decide to do with that whatever you want, but you can easily create the old Wendy's/THI conglomerate by just keeping your shares. I don't understand why having more flexibility in building your position results in a destruction of value.

Disclosure: The author has no position in WEN or THI.