Wendy's board rejects Trian's $7.35 offer and adopts a one-year rights plan

Wendy's (Nasdaq: WEN) said on November 5 that its independent directors unanimously rejected the $7.35-a-share cash proposal from a group led by Trian Partners and adopted a one-year shareholder rights plan, according to a company press release filed with the SEC.

The group, which also includes Flynn Group, BlueFive Capital and Sixth Street Partners, made its non-binding offer on October 28, as FinanceInTime reported. The committee said the proposal "substantially undervalues the Company" and is "not in the best interests of Wendy's and its shareholders."

A rights plan that starts at 15%

The board adopted the plan on November 4, and the company's Form 8-K says it was a response to the October 28 proposal. Under the plan, rights become exercisable if a person or group acquires 15% or more of the common stock, or if a holder that already owns 15% or more buys additional shares, in each case without board approval. The holder who triggers it is diluted, because its own rights become void.

Trian's funds and related parties said in their proposal letter that they own approximately 16.3% of the shares. The press release says the plan expires on November 3, 2027, has no dead-hand feature that would limit a future board's ability to redeem the rights, and was adopted after the investor group "rejected an offer from the Company to enter into a customary standstill agreement."

The same 8-K shows the board also changed its pay rules on November 4. It removed the exclusion in the "Change in Control" definition for transactions involving Nelson Peltz or Peter W. May, and set an 18-month protection period after a change in control for executive severance and equity awards.

The quarter the board is pointing to

Wendy's reported its third-quarter results the same morning, in a separate release. Global systemwide sales fell 5.9% from a year earlier, with US sales down 7.6% and international sales up 3.5%. US same-restaurant sales decreased 5.7%.

Net income was $15.1 million, down from $44.3 million a year earlier, and adjusted EBITDA was $113.4 million, down 17.8%. The company said US company-operated restaurant margin fell 140 basis points to 11.7%, "primarily due to a decline in traffic, labor rate inflation, and commodity inflation." The US restaurant count was 5,711 at the end of the quarter, compared with 5,979 a year earlier.

Free cash flow was $174.2 million for the first nine months, down 10.9% from a year earlier. Chief Financial Officer Steve Cirulis said the company has "approximately $413 million in cash" and is "well positioned to invest in our Dave's Way strategy."

What Dave's Way adds to the argument

The company set out "Dave's Way", a multi-year strategy under Chief Executive Officer Bob Wright, in the same release. It has five pillars: menu with quality food at real value, distinct branding and marketing, operational excellence, a digital experience and restaurants as the engine for growth. The committee argues the strategy is worth more than the offer price reflects.

The company said it revised its breakfast approach to be location specific and that the decision "could unlock up to $200 million in restaurant-level EBITDA across the system." It also signed a letter of intent to acquire up to 163 Wendy's restaurants from franchisee Meritage Hospitality Group, subject to a definitive agreement, "better and higher offers" and court approval. The release does not say what the plan costs or when results should show.

Rejecting a price is easier than proving a plan

We think the board has moved the argument from price to proof. A 5.9% drop in systemwide sales and a 17.8% fall in adjusted EBITDA are the backdrop to a board asking shareholders to wait, and the company's answer so far rests on a strategy that is days old and a breakfast estimate that is a ceiling, not a result.

The opportunity for shareholders is that a rights plan gives the committee time to extract a better price or show progress. The threat is that the clock now runs on traffic: if US same-restaurant sales stay negative for the next two quarters, we expect the case for a higher bid, or for a proxy fight, to strengthen. We would change this view if the next quarter shows US traffic and company-operated margin turning up, or if the group files a revised proposal.

The view in this final section is FinanceInTime's editorial opinion, for information only. It is not investment, tax, legal or other advice, and it does not take your circumstances into account. Forecasts are uncertain and past results do not guarantee future ones.