Hedge fund aims to chew into Wendy's

Date: Wednesday, April 27, 2005
Author: By BARRIE MCKENNA - Globe & Mail

WASHINGTON -- Canadian icon Tim Hortons -- the crown jewel of Wendy's International Inc. fast-food empire -- could wind up on the auction block if hedge fund Pershing Square Capital Management has its way.

Pershing, run by veteran New York hedge fund manager and real estate specialist William Ackman, said yesterday it will pitch a plan to break up Wendy's, after disclosing that it has amassed a 9.3-per-cent stake in the company.

Claiming that Wendy's shares are underpriced, Pershing said it will seek a meeting with company management to suggest ways to boost shareholder value, including a "spinoff of one or more divisions," according to a filing with the U.S. Securities and Exchange Commission.

Analysts said Pershing almost certainly has its eye on Tim Hortons, the Canadian-based chain that now generates half of Wendy's profit and is in the midst of a rapid U.S. expansion.

"A Tim Hortons play is likely on Pershing's mind," said John Glass, restaurant analyst at CIBC World Markets Inc. in New York.

Mr. Glass suggested that Tim Hortons could fetch as much $53 (U.S.) a share -- $10 a share more than the entire company is now worth.

Wendy's shares closed down $1.65 to $41.73 in heavy trading on the New York Stock Exchange yesterday. The stock recently hit a 52-week high amid speculation that it was the target of a leveraged buyout.

Dublin, Ohio-based Wendy's and its board of directors issued a terse statement, insisting that they aren't aware of "any corporate development that would account for the trading volume or rumours."

The company also pointed out that Pershing indicated in its SEC filing that it has "no current intention" of acquiring Wendy's.

The runup in Wendy's stock has come in spite of the image blow the company suffered when a woman claimed to have bitten into a human finger while eating a bowl of chili earlier this month at a Wendy's franchise outlet in San Jose, Calif.

Police later arrested the 39-year-old woman, Anna Ayala Las Vegas, and charged her with grand theft.

Mr. Glass predicted Wendy's would rebuff Pershing's apparently hostile move on the company. But he acknowledged that it still could "force Wendy's to re-examine its business structure and capital structure."

Wendy's bought Tim Hortons, the icon Canadian coffee and donut chain in 1995. Tim Hortons is the leading fast-food chain in Canada, with 2,470 restaurants and a 27 per cent market share, out-serving even Oakbrook, Ill-based McDonald's Corp.

Wendy's also has 258 franchises spread across 10 U.S. Northeast and Midwest states, and has plans to double that number by the end of 2007.

Tim Hortons accounted for more than a quarter of Wendy's $3.6-billion (U.S.) in sales last year and nearly half of its profit.

It isn't clear just how serious Pershing is about targeting Wendy's, whose shares are widely held.

Pershing, which reportedly has a $410-million war chest for acquisitions, says it now controls 10.5 million shares, a stake that would make it Wendy's largest shareholder. But only about 320,000 of those shares are owned outright, while the rest are in call options.

Pershing would have to put up as much as $300-million to exercise those options and take possession of its entire 9.3-per-cent stake, said CIBC's Mr. Glass.

But it just might force Wendy's to do something to keep its stock from falling back down, he said.

"This not a buyout offer, or even a serious proxy fight at this point," Mr. Glass said.

"It does, however, point out that there is hidden value in Wendy's shares and may still prompt a further debate on the matter with shareholders."