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The Fast Food Chain That’s Ripe for a Buyout

Wendy's WENThere’s no doubt that the market loves McDonald’s (NYSE:MCD). The company benefited simultaneously from an economic downturn that drove more customers to low-cost meals, and also introduced a broadside attack on Starbucks (NASDAQ:SBUX) with its wildly successful introduction of coffee.

But what does the market think of the other fast-food brand, Wendy’s (NASDAQ:WEN)? The market appears to be more in love with Ronald McDonald than the cute little girl. No matter how you slice the burger, Wendy’s is outgunned by the clown. That doesn’t mean it can’t survive in the market, but it is struggling these days. That being said, there might be some value in the company that just might trigger a private equity buyout.

The company’s recent earnings report included an announcement of a three-year turnaround plan. I think this is a smart idea.

Let’s start with the fact that until now, Wendy’s had ceded the breakfast meal to its competitors. That’s about to change.

Also, McDonald’s has played around with some of its location design, and did so without changing what the company’s image is. Wendy’s is following suit. The truth is that fast-food joints can either be really clean with a new contemporary design, or kind of old and crappy with a design that hasn’t changed in years. The turnaround does, in fact, kick off with redesigns of its restaurants, and I dig what I’m seeing.

Financially, Wendy’s is holding its own, but not really growing. Revenue was basically flat and operating profit declined 8%. The problem is the company is tottering under $1.3 billion in debt that has debt service of $114 million — which ate up all but $23 million of its operating profit in 2011. The company used much of its cash flow to buy back about 5% of its shares. Now it’ll take its $475 million in cash and cash flow from operations to engage in capex, expansion and renovations.

The story reminds me a lot of Carl’s Jr., which faced numerous challenges over its history, and at one point its stock hit $2. The company turned things around and was bought out for $12.55 per share. I think Wendy’s might be in position for the same treatment, particularly if the turnaround yields results. And before anybody writes Wendy’s off, let’s not forget that it is the No. 2 burger seller in the country at this point, ahead of Burger King.

Wendy’s is a speculative buy at $5 per share. Downside is limited and the potential for the company to double from here is possible over the three-year turnaround period. That also discounts the possibility of a private equity buyout.

As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Capital, Inc., which brokers secure high-yield investments to the general public and private equity. You can read his stock market commentary at He also has written two books and blogs about public policy, journalistic integrity, popular culture and world affairs.

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