Wendy's Buyout Could Be a Tasty Value Deal For Unnamed Suitor

After reaching $5.25 in late April, the shares of Wendy's/Arby's Group (WEN) have been in a steady decline, falling to $4.05 this week. But the stock has seen a nice rebound over the last couple days, increasing to $4.60 thanks to buyout chatter surrounding the company.

Chairman Nelson Peltz said that an unnamed party has indicated interest in a deal. As the largest shareholder of the company, Peltz certainly would be interested in a transaction -- at an attractive price, of course. After all, he's the legendary takeover artist who was responsible for structuring the Wendy's/Arby's merger back in 2008.

To get things rolling, Peltz said he will hire a financial advisor and explore all options, including a possible recapitalization.

Taking a Bite of Wendy's/Arby's

In the brutally competitive fast-food business, it's important to have scale. This is been a boon to leaders like McDonald's (MCD) and Burger King Holdings (BKC), which can offer tasty food at rock-bottom prices. Unfortunately, as the No. 3 player in the market, Wendy's/Arby's has languished and been mostly reactive.

But there are some encouraging signs. In the latest quarter, Wendy's saw an 0.8% increase in same-store sales, despite tough weather in much of the country during February. Also, margins increased from 11.1% to 15.4% (this is from the latest investor presentation).

However, the fact remains that the Arby's business continues to lag. Actually, there was an 11.5% decline in same-store sales for the quarter and margins fell from 14.2% to 10.8%.

But a suitor for a company would likely focus on the overall EBITDA for Wendy's/Arby's, which increased by a nice 14.7% to $92.1 million in the quarter.

Prospects for a Buyout

A buyout seems realistic for Wendy's/Arby's. Interestingly enough, the company is in the same kind of predicament as CKE Restaurants (CKR), which recently agreed to a $619 million buyout. Both companies have suffered from the fierce competitive environment as well as the decline in the economy.

The problem is that a Wendy's/Arby's deal may not fetch much of a premium: The company's enterprise value is roughly 6.88 times EBITDA, which compares to CKE's 6.51 multiple. And Wendy's/Arby's performance will probably continue to lag behind its competitors, which will certainly impact the deal's valuation.