Peltz Aims to Expand Wendy\'s Board

¶ … Peltz Aims to Expand, Control Wendy's Board by Janet Adamy, February 12, 2008, the Wall Street Journal

Wendy's International Inc. is currently facing several difficulties due to increased competition and lack of new products. The company has been struggling to increase its sales and profits, but has managed to do little in this direction. The directors at Wendy's are analyzing a wide array of possibilities to resolving the crisis, such as recapitalization or changes in the business strategy. The recapitalization alternative revolves around a potential purchasing of Wendy's by international corporation Trian.

Trian, the corporation led by Nelson Peltz, announced its intentions to gain more control within the board of Wendy's International Inc. through the addition of two more seats, increasing as such the number of board members from 13 to 15. Then, the firm wants to own five more seats in the board, aside from the three they already own, gaining as such a majority of eight seats in the management board at Wendy's International.

The current statement of Trian's officials does not coincide with the company's initial intentions, when they wanted to buy the hamburger chain. The price was not mentioned nor was a clear offer actually made, but it is estimated that the price per share would be lower than $37 to $41, in a context where the quotation of the Wendy stock is of $23.57 on the New York Stock Exchange.

In all, the real intentions of Triac's in regard to Wendy's International are not clearly stated, moreover since a future purchase of Wendy's would not determine Peltz to push for more seats in the board. It could also mean that the growing concern for more positions in the board is a strategy in case Triac does not finalize the acquisition of the hamburger chain.

2. Article Analysis primary method of looking at Wendy's from a financial perspective is given by the theory of efficient markets, which states that the price of a share will contain information about the company issuing the share (ch.13). From this particular standpoint, one can analyze Wendy's stock at three different moments in time:

When the first offer to buy was made by Trian and the vale per share was established between $37 and $41

When the second buy proposition was made by Trian, at an unspecified value, but inferior to the interval $37 - $41

Presently, February 11, when there is no clear offer to buy and the NYSE established a quotation of $23.57 per share, an increase with 42 cents as compared to the previous trading day

The decrease in Wendy's price per share reveals not only the fact that the corporation is going through problems, but also the gravity of the problems, materialized in a constantly descendant trend in sales and profits. And however the 1.8% increase is a good sign of recovery, the international company has yet a long way to go.

But aside from the information it contains, the stock can be analyzed from a different perspective - the investor's. In this order of ideas, Wendy's share represents the firm's capability for sustainable growth and development. A constantly ascendant and sustainable increase in the price per share is desirable to all investors. And since Wendy's stock is not on this track, they risk loosing the trust of their stockholders and the interest of other potential investors. As such, they might soon be faced with the incapacity of attracting additional funds and investments.

The situation created at Wendy's can easily be connected with the long unanswered question of capital structuring: Can a company increase its value by replacing debt with equity or equity with debt? (ch 15, p.19). The company's need for additional funds could be satisfied through the issuing of new bonds, but the money retrieved from this operation would have to be used to pay Wendy's older stockholders. This strategy would be null, in the meaning that it would not create any advantage nor would it offer a solution. It is only a temporary circulation of capital used to pay the debt to shareholders but it offers no funding or investment possibilities for the organization. Another strategy to gain some short-term financial resources would be to increase retail prices. However, this is not a viable solution and it risks doing more damage than good, as it could lead to a decrease in the company's market share.

The issuing of new stocks could be a temporary solution to retrieving more financial resources. However, the chances of success for such a strategy are rather limited due to the difficulties the company is in and the already decreased quotation. It is true that the stock price increased by 1.8%, but this is not sufficient to boost investors' trust and interest. Furthermore, given the already existent financial difficulties, it would probably be best if Wendy's International looked for funds somewhere else.

The most viable alternative would be to request loans from financial institutions. The reason why this alternative would be preferable to issuing stocks is given by a tax factor. As such, interest expenses are deductible, whereas dividend payments are not (ch. 16, p.32). But given the state the company is in, they might find it difficult to obtain finances from banks. And if they did, the interest rate costs would be extremely high. Furthermore, the bank loan would have to be returned. And this means that Wendy's must invest the retrieved finances into growth and development strategies, which ensure the corporation with future income. But they must also pay the debt to their shareholders. And halving the loan into investments and debt payments can easily lead to insufficient resources to achieve either one of the two desiderates. For the future, this would mean that the company will once again face financial shortages and could easily find itself in the incapability to pay the loan and face as such bankruptcy.

Another potential solution would be lease. This means that Wendy's would close leasing contracts with manufacturing suppliers in order to purchase newer and better technologies at flexible payment rates. These technologies could then be used to improve the quality of Wendy's products and increase the efficiency of their business operations. The lease contract would allow the company to use the purchased items and they would have to pay the supplier a monthly rate. The ownership over the items would only be achieved at the maturity date of the lease contract. However this does indeed sound like a viable solution, leasing involves additional costs and can even prove more expensive than bank loans.

However this is not a pure financial strategy, franchising could resolve part of the shortages within Wendy's. In this order of ideas, the international chain could close franchise deals with international partners. These contracts would allow the foreign partners to run Wendy's hamburger stores in the Wendy culture and ways. It would also ensure the parent company with revenues generated by the franchised stores, but it would reduce operational expenses.