Can Wendy's Reclaim Its Former Glory by Dumping Arby's?

| About: The Wendy's (WEN)
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By Alexander Moschina

When Wendy’s (NYSE: WEN) merged with Arby’s in 2008, the companies said the deal would provide “superior value” to shareholders. Combined sales were expected to reach $12.5 billion. And by cutting redundant costs, management would save an annual $60 million.

Fast-forward to 2011… and pretty much none of that has happened. So where does Wendy’s go from here?

Arby’s: The Millstone Around Wendy’s Neck

In 2010, Arby’s full-year sales fell to $1 billion – a 5.8% drop from the previous year.

And so much for those combined sales hitting $12.5 billion. The total Wendy’s/Arby’s Group revenue only totaled $3.4 billion – a 5.5% fall and the second straight year of decline.

Solaris Asset Management’s Chief Investment Officer, Tim Ghriskey, is in no doubt over who’s to blame here: “Arby’s has been the noose around [Wendy's] neck.”

Fortunately, it looks like that partnership will soon end…

Last month, Wendy’s/Arby’s Group announced that it’s “exploring strategic alternatives for Arby’s… including a sale of the brand.”

Investors loved the news, snapping up Wendy’s shares quicker than sales of old-fashioned hamburgers at lunchtime.

What’s more, Deutsche Bank expects shareholder returns to rise once the company unloads Arby’s. And that’s important for another reason…

Unloading Arby’s will Also Allow Wendy’s to Unload Debt

Cash from the sale will likely go towards paying down Wendy’s debt. Plus, just the announcement of an official buyer for Arby’s will be enough to send shares soaring.

But the question remains: Will dropping Arby’s really be enough to save Wendy’s? After all, the chain spent years trailing McDonalds (NYSE: MCD), even prior to the merger. And recently, Subway pulled ahead of the company, too, both in the number of locations and consumer popularity.

The evidence suggests that while this 43-year-old fast-food giant is down, it’s not quite out…

Lower Prices… Higher Profits

According to Howard Davidowitz, Chairman of Davidowitz & Associates, it isn’t Wendy’s product that’s the problem: “Wendy’s has a quality image, but they don’t have a value image.”

In other words, if it’s going to compete with McDonalds’ Dollar Menu or Subway’s $5 foot-longs, the company will have to offer up more low-priced meal options. And it’s already making some serious strides…

Back in October, the company added seven new items to its 99-centsEveryday Value Menu. And each one counters an item from McDonald’s discount menu.

So with price no longer a deterrent, business is sure to grow over the coming months. After all, according to both the 2009 and 2010 Zagat surveys, Wendy’s ranks #1 in quality among fast-food restaurants.

According to Wendy’s Chairman, Nelson Peltz, “Arby’s is a good business… [but] the reality is that the Wendy’s brand, given its relative size and scope, is the key driver of shareholder return.”

No doubt. While hindsight shows that the merger with Arby’s was a mistake, it’s thankfully one that the companies won’t have to live with. Even for Arby’s, going private could be just what it needs, free of a larger, more dominant partner.

One thing is for sure though: When the dust settles, I expect Wendy’s to be in its strongest position in years.

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