By JULIE JARGON And ANNIE GASPARRO
Wendy's/Arby's Group Inc. is finally flipping its ailing Arby's chain so it can focus on putting more sizzle into its core burger brand.
The company agreed Monday to sell most of Arby's for $130 million in cash to a group led by private-equity firm Roark Capital Group, whose food and restaurant holdings include the parent company of Cinnabon and Carvel Ice Cream.
Wendy's/Arby's chairman Nelson Peltz, whose hedge fund, Trian Fund Management LP, owns a stake in the fast-food holding company, has a history of pushing food companies to jettison underperforming brands and focus on the best assets. He urged Cadbury Schweppes PLC to separate its chocolate business from a beverage business that included 7UP and Dr Pepper. He pressed Kraft Foods Inc. to spin off its Post cereals unit.
Arby's had been in decline for many years and suffered during the economic downturn, in part, because its signature roast beef sandwiches were too expensive for customers who were looking for—and finding—deals elsewhere. By the end of 2009, Arby's had the highest average check in the industry. Many restaurants, from fast-food chains to steakhouses, were offering discounts or promotions to lure in cash-strapped customers, but Arby's didn't launch a 'value' menu until April 2010.
While Arby's was proving to be a drag on the company, rival McDonald's Corp. was gaining strength. McDonald's posted strong same-store sales growth throughout the economic downturn, remodeled restaurants around the globe and rolled out a slew of new menu choices.
In January, Wendy's/Arby's said it was exploring options for Arby's, including a sale.
The decision to sell Arby's also had to do with the need for international expansion. With little room to grow in the mature U.S. market, most chains are looking abroad. Wendy's is considered better positioned to expand internationally than Arby's, thanks to its broad brand recognition.
Without facing the distraction of operating Arby's, the company also will be better able to revamp the Wendy's menu. The chain recently updated its salad line-up, introduced French fries seasoned with sea salt and rolled out breakfast items. The chain is testing new cheeseburgers with larger beef patties, working on improving its chicken offerings and planning to introduce new breakfast beverages. Wendy's also plans to remodel restaurants and begin pegging its menu prices to specific markets to be more competitive.
Still, the company will retain 18.5% stake in Arby's, which has recently began turning around, in part due to a new advertising campaign and new products. In May, Arby's reported a 5.5% jump in same-store sales for the first quarter.
'We believe in the long-term success of the Arby's brand, so we told [Roark] we'd be interested in keeping an equity stake in it,' said Wendy's/Arby's Chief Executive Roland Smith. 'But, we still do believe it's in the best interest of our shareholders to focus all of our capital, both human capital and financial, on Wendy's.'
Sara Senatore, restaurant analyst at Sanford C. Bernstein, said Wendy's/Arby's decision to remain invested in Arby's 'reflects the fact that they have seen some turnaround on the Arby's side, and now they want to participate in the upside.'
While some analysts expected a full divestiture of Arby's, others say the bigger surprise is that the company found a buyer that agreed to the deal the company apparently had in mind. Morgan Stanley restaurant analyst John Glass said in a research note that the announcement is 'most notable in that it was actually completed and at a reasonable valuation,' after months of anticipation.
Wendy's/Arby's said recently it had received multiple bids for the chain.
Under the deal, expected to close in the third quarter, Wendy's/Arby's will receive about $130 million in cash, and the 18.5% stock interest in Arby's is valued at about $30 million. Roark will assume about $190 million of Arby's related-debt. The transaction triggers a tax benefit of about $80 million to Wendy's/Arby's. The parties said the deal has a total value of about $430 million.
Roark will invest about $180 million at the closing, covering the cash portion of the deal, transaction costs and capital for Arby's. Roark also committed to spend up to an additional $50 million through 2013 in capital.
Wendy's/Arby's will drop Arby's from its name when the deal closes. Mr. Smith said the company's new name hasn't been finalized.
Write to Julie Jargon at julie.jargon@wsj.com and Annie Gasparro atannie.gasparro@dowjones.com
This article appeared in the June 14 publication of the Wall Street Journal.
