Fastfood company Wendy’s International has announced a series of strategic initiatives which it says are to enhance shareholder value, including the sale of 15% to 18% of Tim Hortons in an initial public offering.
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“We are taking strategic actions to improve Wendy’s performance and highlight the value of Tim Hortons,” said chairman and CEO Jack Schuessler. “The strategic initiatives reflect the evolution of our business and represent the most effective way to enhance value for our shareholders and other stakeholders.”
The board of directors unanimously approved a plan to sell 15%-18% of Tim Hortons in an initial public offering. The company hopes to complete the IPO by the end of the first quarter 2006 and would retain ownership of the remaining 82%-85% of the Tim Hortons business.
An IPO of 15%-18% would preserve the ability to complete a tax-free spin-off to Wendy’s shareholders if the board decides to pursue such an initiative in the future.
The board and management had previously considered various alternatives for Tim Hortons. The strategic and financial rationale for pursuing the IPO now includes:
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By GlobalDataTim Hortons is able to internally fund its growth, in contrast to its reliance on the company for capital to expand since its merger with Wendy’s in 1995 through the early 2000s.
Tim Hortons is generating significant growth with annual same-store sales increases of more than 7% in Canada since 2000. Tim Hortons has expanded from 1,980 restaurants in 2000 to 2,721 at year-end 2004.
Tim Hortons “Always Fresh” par-baking initiative (Maidstone Bakery) is a proven success, but was still being developed in the early 2000s. In addition, the business has expanded its vertical integration initiatives with its Maidstone Coffee roaster and a distribution business in Canada (dry and frozen goods).
The company plans to reposition its Tim Hortons US business by accelerating re-franchising of company stores and continuing to open new restaurants with franchisees.
The chain will review its portfolio of US stores, including the New England locations acquired in 2004 and converted to Tim Hortons. These units have produced lower than expected sales, which has negatively affected profitability in the US
The company completed a thorough review of its Wendy’s business and plans to maximize profits and returns in the US Canada and International markets.
Strategic initiatives include:
Rebalancing the US store mix: Following a review of its portfolio of 5,935 U.S. stores at year-end 2004, which consisted of 22% company operated and 78% franchise operated units, the company will pursue the sale of certain stores to franchisees that are in areas where it is not efficient for the company to operate. Through these sales, Wendy’s plans to lower the mix of company operated stores over the next two to three years from 22% to a range of 15%-18%. Wendy’s will continue to provide leadership to the system with innovation in operations, new products, buildings and equipment. The Company may also buy certain stores from franchisees for strategic reasons. Management believes this initiative will increase operating margins and improve overall performance.
Closing underperforming US company stores: The company has analyzed its US company store base and intends to close 40 to 60 underperforming restaurants that are negatively impacting profits and returns.
Selling franchised real estate: At year-end 2004, Wendy’s owned 217 US sites where it leases real estate to franchisees. The company intends to pursue the sale of this real estate to franchisees or third party investors, where feasible.
Slowing new store development: Wendy’s will slow US company new store development, which has averaged 71 units over the past four years, to a range of 30 to 40 beginning in 2006. The company is adjusting its development plan due to rising real estate and building costs, as well as margin pressure, and to focus on improving unit level economics.
Rebalancing Wendy’s store mix in Canada: The company assessed its portfolio of 154 company operated and 230 franchise operated units in Canada. Management intends to close certain underperforming units, re-franchise units in certain provinces and limit development to the most profitable areas.
Facilities actions at Wendy’s are expected to generate net gains from re-franchising stores and selling real estate, which would offset potential charges from closing underperforming stores. Management expects the accumulation of gains and write-offs/charges will be neutral or slightly positive to earnings, while improving return on assets and invested capital.
Slowing Wendy’s new company store development is expected to save $50 million to $60 million in annual capital expenditures as management focuses on improving return on assets and return on invested capital.
The amount of cash generated from the Tim Hortons IPO, facilities actions and slowing Wendy’s company store development is dependent on market and business conditions. The company plans to use the cash primarily to repurchase common shares of its stock.
“While we believe there is significant growth remaining in the Wendy’s business, our initiatives are focused on improving returns and cash flow,” Schuessler said.
“The board and management are confident that the initiatives announced today will result in greater value for our shareholders and other stakeholders,” he said. “While the implementation of the plan will be dependent on market and business conditions, we currently anticipate completing the IPO of Tim Hortons in the next nine months. The other strategic initiatives with Wendy’s will begin immediately and continue over the next two to three years.”
