As noted by Wendy’s (NYSE:WEN), it costs a franchisee between 275k and 625k to open a franchise, excluding land acquisition costs (this number includes the franchise fee). This is actually on the very low end of what it costs to open a burger joint, as both McDonald's (NYSE:MCD) and Burger King cost between $1 and $2 million. On a pure reproduction basis (just the cost of what it would take a potential franchisee to open these Wendy’s) and assuming a mid-point cost to build (420k), the common is worth $1.97. At that price, an investor picks up the four other restaurants for free, plus the Bahamas investment. Also, because land costs are excluded in the cost to open numbers and the company owns the land under 14 franchises, an investor picks the land up for free as well. Note that the 420k price fits very well with what we’ve seen in recent transaction, as Wendy’s sold 12 company owned restaurants to a franchisee in 2009 for an average price of $420,000 This could even be too low, as Wendy’s new management has noted that Wendy’s company owned stores substantially underperform franchised store (about 500 basis points lower gross margins), and thus likely sell for less.
Looking at other burger chains, Jack in the Box (NASDAQ:JACK) has sold hundreds of company owned restaurants between 2004 to 2009. While this included some Qdoba restaurants, the average price for the restaurant was 640k, plus the franchises had to pay a franchise fee on top of that. Burger King averaged 416k over the past three years on 180 sales to franchisees. Sonic has averaged 519k over the past three years on 227 sales. While the numbers vary, I think it’s clear that a valuation of 420k per store is quite conservative, and still results in a price more than 10% above today’s price, and this assigns no value to the land the company owns, the other restaurants, or the partnership in the Bahamas.
In the last post, I will look at MHGU on the basis of their earnings.
So what is the land worth? In a recent write up on Wendy’s by macrae538, he notes that the average asking price for a Wendy’s building plus the land underneath averages $1.4 million. That number is almost exactly what the company has averaged over the past five years. Assuming an average value of $1.1 million for the properties (a markdown for tougher economic times and a discount for Michigan and Florida real estate), the land value would add another $2.81 in value per share. Combined with the value from owning the Wendy’s operation, this yields a per share value of$4.78, and we still have assigned no value to the other four restaurants or the Bahama’s partnership.
How about the other four restaurants? Originally, these were all franchised O’Charley’s (NASDAQ:CHUX) operations. However, the O’Charley’s have been substantial money losers, and the company recently converted one of them to a new concept they have started, Twisted Rooster. The new concept has yet to operate for even one full quarter, so there is almost no data available on it. However, the press reviews seem to be favorable and it appears to be popular enough. The concept has been successful enough so far that the company plans to convert the remaining O’Charley’s into Twisted Rooster concepts, and if the concept proves to be successful it could add substantial value. However, for the purposes of this valuation, I assign the concept no value, and instead treat it as a free option. (Note- the company owns the land and building for two of these restaurants and just the building for one, so there is some value in that real estate. Also, since the O’Charley’s concept has been a substantial money loser, if the new concept is just break even, it should unveil the value of the Wendy’s restaurants).
Finally, there is the value of the Bahamas partnership. As mentioned above, they effectively own just over 46% of this partnership, which consists of 900 acres on an island in the Bahamas that the CEO has compared to an undeveloped, pristine Hawaii. The company has been very quiet in releasing information in this project. However, they have recently begun disclosing that they have listed the property for sale with a real estate broker for $33 million. Assuming they take a huge haircut from the asking price and sell it for $20 million (about 60% of what they have it up for), they would net $9.2 million for their stake in the partnership, which would add an additional $1.68 per share in value.
To sum this all up, I have argued their Wendy’s franchises are worth $420k per store. With 69 stores, their Wendy’s stores are worth just under $29 million. They own the land + building for 14 stores, which I argue is worth $1.1 million per store, or another $15.4 million. Finally, they own a 46% interest in the Bahamas partnership, which is worth $9.2 million assuming they fetch 60% of asking price. This gives an enterprise value of $53.6 million. With $12.9 million of debt, $295k of series A preferred, and $5,000,000 of series B, this leaves $35.4 of equity value, or $6.48 per share, and still leaves an investor with a free call option on the Twisted Rooster brand if it develops into anything. Also, note how close this is to the value arrived at by adjusting their book value with management’s stated assumptions for goodwill and making some adjustments for economic reality, and these values were reached using numbers that I think were very conservative.
Disclosure: Long MHGU.PK.