Wendy’s Debt Load: Good for Franchisees? Not.
The Wendy’s Company levered up to the tune of $2.5 billion on June 1st, and while that’s good for short-term thinking shareholders, it can’t be good for franchisees in the long-term investing business.
Wendy’s $2.275 billion debt financing, known as a Whole Business Securitization, increased the debt of the operator and franchisor of 6,500 Wendy’s restaurants by almost a billion dollars, to approximately 6x EBITDA, a leverage ratio no self-respecting franchisee would ever dare undertake.
The debt will be used for $1.4 billion in share buybacks of course, the typical game plan of Wall Street’s “asset-lite” crowd, including repurchasing $211 million of shares owned by Wendy’s Chairman/activist-in-chief, Nelson Peltz. 30% of the company’s capitalization will be repurchased with the new debt and proceeds of refranchising 640 company stores to franchisees.
When the dust settles, Wendy’s will own roughly 5% of system’s stores, down from 23% in 2012. It will eventually slash G & A spending by $80 million and capital expenditures by $175 million. EBITDA will decline in 2015, but Wendy’s predicts it will rise by a few points in 2016 and 2017. Then high single digit EBITDA growth is predicted for 2018 and beyond.
Wendy’s “hockey stick” projections include a plan to develop 1,000 new units by 2020 and that 60% of its entire system will be remodeled. By 2020, the company predicts average unit volumes of $2 million and restaurant margins of 20%.
Unfortunately, here is what will happen. By 2020, Peltz, Wendy’s current management team, and all the short-term thinking shareholders who benefitted from this deal will be long gone. The franchisees will have to live with the consequences of all the debt.