Wendy's: The Tim Horton's Spinoff Destroyed Value

Shares of Wendy's (WEN) closed down 3.7% at $38.26 Monday after the company cut its full-year earnings forecast and currently sit at $37. Wendy's also said for the third time since April that it is considering a sale. They lowered 2007 EPS guidance to $1.09-1.23, down from a $1.26-1.32 forecast and below analyst expectations of $1.27. EBITDA is now forecast at $295 million-315 million versus a prior range of $330 million-340 million. Wendy's, which is facing intense competitive pressure, has also had to contend with agitation from activist investor Nelson Peltz and former shareholder William Ackman that action be taken to boost the company's share price.

Activist investor Bill Ackman, though his Pershing Square Capital hedge fund, owned 6.42 million as of 9/30/2006. By 12/31/2006 after he got the spin he wanted that stake was liquidated. Now holders are stuck with a third rate burger chain that is missing what would have been the fastest growing part of it.

Ackman was instrumental in pushing Wendy's to spin-off its Canadian Tim Horton (THI), which was completed in Sept. 2006. Given the popularity of the Tim Horton's coffee and the overwhelming success McDonald's (MCD) has had with it's premium coffee offering, one has to wonder how much better off Wendy's would be if it was serving the coffee in its stores, and at its drive-thru's. One thing is for sure, it would not be any worse, AND it would be driving traffic to its stores for the coffee.

This what happens when management caves to somebody who only has a short term interest in the company. Conversely, Ackman's demands to McDonald's were essentially rebuffed. Yes, it spun the Chipotle (CMG) chain, but that was rumored in the works before Ackman stepped in. He then wanted a sale of the corporate owned stores and real state sales but was denied by management. Where is McDonald's sitting now? At an all time high with a future as bright as it has had in decades. It should be noted that Ackman, even though he was denied his proposed changes, is still a McDonald's shareholder, apparently even he sees the bright future there.

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

See response to this article: Tim Horton's Spinoff Was Healthy For Wendy's Investors