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John A. Gordon is Principal and Founder of Pacific Management Consulting Group (http://www.pacificmanagementconsultinggroup.com), an independent restaurant analyst providing research and niche earnings analysis, management consulting and advisory expertise to those who need to know about chain... More
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  • YUM and Wendy's: Chain Restaurant Operator Concept Decombination 0 comments
    Jan 20, 2011 3:16 PM | about stocks: WEN, YUM, MCD
    YUM and Wendy’s: Chain Restaurant Multi Brand Operator Decombination Continues
     
    This week’s announcements that YUM will shop the Long John Silver’s (LJS) and A&W Brands, and announcement today that Arby’s will be shopped by Wendy’s/Arby’s means that multi-brand chain restaurant operator decombination is continuing.
     
    Less is More: The stronger are jettisoning the weaker since there is some deal capability present and because it makes sense. This is a continuation of long-term conglomerate disentanglement. Look at the difference between all the brands McDonald’s had in 2002 (several) versus now (one), and its performance, for example. Many of today’s and yesterday’s weak or essentially out of chains trace their problems back to M&A hell and a lack of focus.    
     
    YUM is an extraordinarily complicated company with most of its emphasis on China and International, where the older US brands are perceived much differently than here and have much higher average unit sales (2 times that of US) and very fast, 2-3 year cash on cash returns. The 2002 LJS/A&W merger was to buy YUM capability of multi-brand individual unit combinations with those brands. Nine years later, that strategy is dead with both YUM (and Dunkin Brands) abandoning it.   
     
    Wendy’s/Arby’s: With lunch/dinner only sales at $1.4M, third highest in the domestic QSR Burger universe (and number two of the national chains), Wendy’s has a very nice platform to build upon once they get breakfast working and in place. Their menu and R&D platform has been radically improved since 2008. Regarding Arby’s, with two plus years of negative sales comps, and very low (single digit) unit level EBITDA margins, we can imagine the stress throughout the Arby’s community.
     
    What could make these transitions work?
     
    The price, leverage and cost of capital: how much is the EBITDA multiple and total debt, what is the debt/equity mix, what is the effective cost of both, what is the resulting debt leverage and what’s the cost of capital. Also look for capital expenditure (MUTF:CAPEX) caps and covenant terms. How will the CAPEX for weak franchisees be funded?
     
    Since these chains are primarily US based, new management has to get a creative game plan to concentrate and fix the US business first, including franchisees. Our opinion is that US unit site rationalization (closings/relocations), along with franchisee workout and reorganization will be essential.
     
    Quality of executive leadership: the industry has a track record of rotating industry veteran CEOs from chain to chain. A US expert with a record of working with franchisee restructuring is important.
     
    Franchisees need to be aware, supportive and involved:  Its highly likely the degree of franchise system due diligence will be far greater than in the past. Franchise based companies are highly valued for their “predictable” cash flow, low CAPEX and isolation from commodity cost swings, but the franchisees have a role since they are the ones who have their capital and equity on the line, and ultimately, have to make it work operationally.
    Themes: restaurants, retail Stocks: WEN, YUM, MCD
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