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"Nauseating Theft" by Nelson Peltz



June 30, 2009 – Comments (6) | RELATED TICKERS: WEN , CHK

So I was flipping through Barron's yesterday afternoon while my son who was home from school sick was taking a nap and I came across a Barron's article about Wendy's / Arby's (WEN) titled "Appetizing Prospects" (the company's stock soared nearly 11% yesterday in response).  Before reaing the piece I thought to myself, cool Wendy's food is so much better than Burger King's or McDonald's perhaps this could be an interesting investment.  When I read the article though, I decided that there is nothing appetizing about what's going on at Wendy''s disgusting.

Since its merger with Arby's, the famous investor Nelson Peltz has accumulated a 22% stake in the combined company.  OK, fine activist investors or whatever you want to call this slimebag do this sort of thing all the time, but look at how this guy is stealing from the company.

As if all of this skimming off of the top wasn't bad enough, Peltz basically forced a company that had a decent balance sheet to assume all sorts of debt for absolutely no reason.  A little while ago, Peltz and friends "encouraged" Wendy's management to issue $565 million in bonds at freaking 10.5%.  Ahhh hello, the glory days of leverage are over Mr. Dinosaur.  Companies that have huge wads of debt are being punished by Mr. Market today, not rewarded.  And Peltz wonders why his company is being awarded a lower multiple than MCD.  It's because he's an idiot. 

I can deal with the fact that $132.5 million of the new debt went to pay off bank loans, assuming the interest rate on that debt was worse than 10.5% and that's a big assumption, but what about the rest of it?  At the time that the bonds were issued, the company was generating $100 million in free cash flow, had $137 million in cash, and $116 million in investments.  Its next payment on any debt wasn't due until 2011 and its bank loans weren't scheduled to mature until 2012.  The rest of the money that was issued through the new bonds was earmarked for "general corporate purposes."  OK then.  That means paying a dividend to himself or buying back his own shares.

On the issuance of the bonds, Peltz said "Our philosophy is that when the money is available, you take it, and take the risk out of your balance sheet."  WHAT?  OK, so taking a company that was in good shape financially and levering it up at over 10% to potentially buy back shares is his idea of taking risk out of the balance sheet?  Give me a break.  Immediately after the plan to issue the bonds was announced both S&P and Moody's cut their ratings on the company.  Earth to Peltz, the spreads between junk paper and Treasuries are narrowing, not getting worse.  There wasn't any risk in waiting if you really wanted to raise money.

Adding insult to injury, Peltz has forced Wendy's to pay his own company Trian, which consists of him and something like four other dudes, a million dollars per year for "advise on acquisitions, financing, investment banking and activities to increase shareholder value."  Good grief.  Furthermore, Wendy's is paying Trian another $900,000 for Trian to assist it in selling non-core assets, of course with a bonus on top of that if the proceeds "exceed expectations."  The piece de resistance is the fact that Wendy's has $75 million invested with Trian.  I'd love to know what the rate of return on this money has been.  Wendy's management has decided that it wants to take this cash back and it is paying Trian a $5.5 million withdrawal fee.

There's a lot to like about WEN.  It has some undervalued assets, should be able to squeeze economies of scale out of its deal with Arby's, is reintroducing breakfast, has a new CEO who is a successful franchisee that should make the company more efficient, but the disgusting theft from shareholders by Peltz is making me pass on it.  I recently sold a successful investment in CHK because watching Aubrey McClendon steal money from the company made me sick.  I'm passing on WEN as well.


6 Comments – Post Your Own

#1) On June 30, 2009 at 6:51 AM, JakilaTheHun (99.92) wrote:

Great blog.  I didn't dive into researching Wendy's quite as fully as you did, but when I took a look at them not long ago, I saw a lot of stuff I didn't like. 

Theoretically, Wendy's might not be that bad of an investment because they've been the fast food franchise that has done the best job at changing to accomodating more health-conscious consumers.  I'd say only Chick-Fil-A has more healthy items of the major chicken and burger joints.  But as you point out, there's just too much not to like there.

10.5% on the bonds is ridiculous!  That's a very high rate of interest right now.  I can think of absolutely no benefit to that.  


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#2) On June 30, 2009 at 7:57 AM, Varchild2008 (83.70) wrote:

OOPS... My apologies greatly... Not sure if it went through or not.. I meant to give you +1 Rec for a good read and may have accidentally clicked on Report.  I quickly hit the back button though.

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#3) On June 30, 2009 at 9:38 AM, Evlampius (< 20) wrote:

BACONATOR!!!!!!!!!!!!!!!!!! .....  lard is nature's perfect food. I think they have plenty of that crap.

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#4) On June 30, 2009 at 10:09 AM, Vet67to82 (< 20) wrote:

Good post .. great observations.   Thanks for the hard work.  Definately recommended reading.   You've got my REC!

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#5) On June 30, 2009 at 3:51 PM, AdirondackFund (< 20) wrote:

Nice post deej. 

I actually know Mr. Peltz.  His son tried out for my Elite Ice Hockey team some years ago.  The plan was for them to establish their own team, in their own age group,  to run it themselves, and to boilerplate the succesful franchise that I had established from the humble beginnings of just 9 players.  To make a long story short, the Peltzies got Pelted.  First they showed up for Tryouts and reconnoitered the talent I had helped assemble for them, at some arm twisting too I might add, since most Youth Hockey players, and kids in general, are very sharp at liking or disliking a certain person based simply on how 'they walk'.  After the tryouts were over, the parents and kids that I had tried to recruit came to me, with the kid's 'eyes rolling', and said 'look, we appreciate what you are trying to do, but we have alot better options.'  Not being a jerk myself, I agreed with them and sent them on their way.  They all did just fine without me or our team.  But wouldn't you know it.  Peltzie then went off and established his own team, in direct competition with mine.  He even attempted to steal some of my players....truly a no no in the world of Youth Ice Hockey, and the sure sign of a less than reputable man.  Needless to say, the Youth Hockey World is rather small and word got around quickly.  His team did ok, about 60% wins in the vastly competitive AA and AAA world we live in, but he forgot one detail.  He never stayed around long enough to admire the system I had put in place.

To make a long story short.  Peltzies team failed miserably in their second year.  That's critical.  No one will come back to you unless they had a good experience, right?  The team folded.  He then set up another team using the same NAME as my team.  It was at that point that he was laughed out of the Youth Hockey world. 

You see, some managers are actually better than their owners.  Proof positive of this is that in the age group that I trained ALL of the kids went on to play College Ice Hockey.  In each to the last 4 years, one of my players made it to the NCAA finals.  You can imagine my admiration for the hard work of both the parents and the kids for doing everything necessary to get there.  Peltz never made it.  My guess is he won't make it with Wendy's either.  I guess I am like the kids in the sense that some people just tell you who they are by the way that "they walk". 


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#6) On June 30, 2009 at 4:08 PM, ibarz (82.07) wrote:

I thought these strategies are dead, but apparently not. The problem we have with this is mutual funds are in cahoots with scumbags like pelzt, and they buy this stock, which is essentially no a piece of s--t. A perfect example is burger king, which did EXACTLY the same thing two years ago. Loaded up the company with $500M worth of debt that was used to pay a dividend, THEN offer it on an IPO. They get away with it because of the mutual funds that buy their stocks.

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