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Sell WEN Calls

|Includes:The Wendy's Company (WEN)

There are rumors going around the Street today that Peltz is exploring a go-private deal at ~7.5x EBITDA... Not going to happen for several reasons.

1 - Peltz loves to rattle the cage.  He is a publicity hound - the mere fact that he filed a 13D when he was just "approached' by potential buyers, w/o revealing further information (ie., pricing), when majority shareholders are typically "approached" on a weekly basis by PE, hedgies and the like show that today's rumor is likely the latest in a long line of teases.  Recall his foray into Cadbury.

2 - 7.5x EBITDA is not enough.  The rumored multiple implies a $4.80 price on 2010 consensus EBITDA, or ~15% from today's close.  This is too low.  Peltz bought WEN in 2008 looking for a home run.  He went through nearly a year of wrangling with shareholders to get the transaction approved.  He will not cash out for 15%, not while he's still deeply underwater.

3 - The story is broken.  While brand Wendy's has been a relative outperformer in the space, Arby's seems to scream DEFERRED CAPEX!!!  Channeling Warren Buffett, EBITDA is not the correct way to value WEN, because the tooth fairy does not pay for capex.  Said another way, PE typically looks for misunderstood cash flow stories that can be quickly fixed and IPO'ed in ~5 years.  Arby's is the opposite, it is a net cash consumer, and brand Wendy's will require a much much longer time horizon given its planned rollout of breakfast.


What does this mean?
WEN will not be sold.  Valuations have troughed, but near-term fast food fundamentals remain depressed.

What to do?
Shares are attractive at ~6x EBITDA, ~$4.  Sell slightly out of the money covered calls for yield.


Disclosure: None
Stocks: WEN