The Beef at Wendy’s

Wendy's CFO-turned-CEO is under heavy pressure to sell, much of it from an aggressive hedge fund manager who has been on the fast-food chain's case...
Tim Reason and Stephen TaubJune 20, 2007

It’s been a rough week already for Wendy’s. On Monday, the hamburger chain, which has been under intense pressure to improve performance from hedge fund manager William Ackman of Pershing Square Capital for more than two years, lowered its earnings outlook for 2007 and said it was reviewing its strategic options, including a possible sale of the company.

That may make Ackman happy, but credit rating agencies didn’t like it at all. On Tuesday, both Moody’s Investors Service and Standard & Poor’s lowered their ratings on the company’s debt — already below investment grade — and warned that the ratings may be cut again in the future.

“The Special Committee has determined that the exploration of a sale is the appropriate next step in the investigation of value-creating alternatives for our stakeholders,” said James V. Pickett, Wendy’s chairman of the board and the special committee. “While a sale remains only one of the alternatives under consideration, we believe it merits more thorough examination.

The possibility of a sale is freighted with significance for CEO Kerrii Anderson. Before Anderson was promoted to her current slot from CFO, Pershing Square’s Ackman warned that if the company should be sold if it “can’t find the right person to run the business.”

Anderson noted Monday that the company has delivered 12 consecutive months of positive same-store sales through May, but conceded that the last two months have been “challenging,” citing its aggressively adjusted pricing. “Our strategy to revitalize the Wendy’s brand, improve our bond with customers and generate sustainable same-stores growth is producing positive results,” said Anderson.

Moody’s said its downgrade was prompted by the company’s continued weak operating performance, but added: “The review for possible downgrade reflects Wendy’s recent announcement that the special committee of its board of directors has decided to explore a possible sale of the company and is also evaluating a possible securitization financing that could be used by a potential acquirer.”

The securitization financing didn’t sit well with Standard & Poor’s either. “We view this action as a more aggressive financial policy that could result in a highly leveraged capital structure and reduced cash flow protection,” said Standard & Poor’s credit analyst Diane Shand.

S&P cut Wendy’s corporate credit rating by two notches to “BB-minus,” three steps below investment grade. All ratings remain on CreditWatch with negative implications, it added. Moody’s cut Wendy’s debt to “Ba3,” three levels below investment grade, and placed all ratings on review for further possible downgrade. In its report, Moody’s warned that a sale or capital restructuring that results in a material deterioration in debt protection metrics could result in a further lowering of the company’s ratings by multiple rating levels.

Both rating agencies expressed concern about the company’s deteriorating debt protection metrics, including debt-to-EBITDA and EBIT coverage of interest, as well as the significant competition and commodity cost pressure Wendy’s faces.