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Hedge-Fund Stakes In Wendy's Spur Breakup-Value Analysis

Date: Friday, April 29, 2005

DES MOINES, Iowa (Dow Jones)--Spurred by the disclosure of two major hedge- fund stakes in Wendy's International Inc. (WEN), analysts are calculating the restaurant company's potential breakup value.

As might be expected, there's substantial divergence in their conclusions. Breakup values range from $47 to $55.

Wendy's shares were changing hands recently at $42.47, down 23 cents, or 0.5%, in composite New York Stock Exchange trading.

Speculation about the company's future gained substance this week when Pershing Square Capital Management and then Highfields Capital Management disclosed stakes of 9.3% and 6.1%, respectively.

The two hedge funds are understood to be operating independently. While Pershing Square's 13-D filing indicates an activist role in the company's affairs, Highfields' 13-G filing signals that it is adopting a passive stance.

Pershing's filing said it has no desire to seek control of Wendy's but rather wants to unlock shareholder value, contending that the company's stock is trading substantially below its intrinsic worth.

The New York fund is believed primarily intent on convincing management to separate Wendy's Canadian coffee-shop juggernaut, Tim Hortons, from the rest of the company.

Tim's, as it is commonly called, is seen on Wall Street as Wendy's crown jewel. In the first quarter the chain accounted for 28% of the company's revenue but nearly 70% of its operating income.

But Tim's worth on a stand-alone basis is debatable.

Piper Jaffray analyst Peter Oakes called unwarranted "pie-in-the-sky portfolio valuations suggesting the value of Tim's is at least equal to the current valuation for all of Wendy's." Moreover, Oakes said he doubted that for all its market-share dominance and popularity in Canada, Tim's will be able to continue to produce same-store sales in the future "anywhere close to what it achieved over the last few" years.

"Throw them a bone and jettison Baja Fresh," the company's troubled Mexican grill unit, he suggested as management's response to the hedge-fund stakeholders. Still, doing so won't "capture a significant premium to current valuation when the base Wendy's business is still trying to revive itself and Tim Hortons is possibly due for a breather," Oakes said.

Credit Suisse First Boston termed this a transition year for Wendy's. But its restaurant analyst, Janice Meyer, said that if all parts of the business were performing well, the company might be worth $50 to $55 per share.

Looking at various value-adding options, she characterized a leveraged buyout as expensive. And while selling store properties could offset some of an LBO's cost, since much of the real estate is in Canada such an option "is not an easy one and may not make sense for a buyer," she said.

Wendy's senior management refused to discuss such options during a conference call Thursday. Asked by Dow Jones about the situation, a company spokesman declined to elaborate. But CIBC World Markets analyst John Glass said the hedge- fund filings are likely to prompt an in-depth internal study of the company's breakup worth, which he put at $53 a share. Glass raised his price target on the stock to $45 from $42.

Friedman Billings Ramsey boosted its price target to $50 from $43, based on a multiple of analyst Howard Penney's projection of $2.39 in per-share earnings in the next 12 months. He termed the stock "undervalued, under-leveraged, and now, under pressure," noting that about 45% of its stock has traded in the past two weeks.

Lehman Brothers calculated a sum-of-the-parts of $47 for the company. But analyst Jeffrey Bernstein said recent speculation has "unleashed a significant portion of the incremental value, making the cost/benefit of a spinoff (of Tim Hortons) at current levels more difficult to determine and therefore less likely."

Operating "two powerful brands in different sectors of the fast-food segment has led to balanced long-term revenue and EPS growth...the key reason why management would not consider a spinoff," Bernstein wrote.

Goldman Sachs' Steven T. Kron didn't report a breakup calculation but said that, based on his outlook for fundamentals in Wendy's business, "we see fair value of $42-$44, which implies little upside from current levels. However, due to continued speculation of a breakup of the company, we believe shares will likely remain volatile and could even trade higher from here."

Banc of America Securities reiterated its sell rating on Wendy's, contending that the stock is overvalued on a fundamental basis and fully reflects the value of Tim's.

John Ivankoe at J.P. Morgan Securities, who rates the shares neutral, advised investors to "take profits on recent stock strength due to continued buyout/ spinoff speculation."

Reflecting disappointment with the hamburger chain's first-quarter performance, Moody's Investors Service Friday placed Wendy's long-term debt ratings on review for possible downgrade.

None of the analysts mentioned personally owns Wendy's shares but their brokerages said investors should assume they seek to do business with companies covered in their research reports.

- Richard Gibson, Dow Jones Newswires; 515-282-6830; dick.gibson@dowjones.com

  Dow Jones Newswires
  04-29-05 1410ET 
Copyright (C) 2005 Dow Jones & Company, Inc. All Rights Reserved.