"Nauseating Theft" by Nelson Peltz
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...it'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.