Description

I contend that this is a very cheap stock, but it is hiding behind multiples
that don't look like "value". I could run every value seeking screen in my
arsenal and Triarc would not come up. The stock trades at 35 times earnings,
3 times book value and pays no dividend. And even if I did a ten minute
look, the financials are extremely difficult to figure out. Most value
investors would stop reading right about there - I know I would have. The
financial statements are very confusing due to the complete transformation of
the company in the last year from an operating business to a pile of cash.
The stock is misunderstood and undiscovered.

Let me frame it this way. The stock trades at 25 and change. For that price
you get $30 dollars in cash plus a low-risk business worth best guess $7-12 a
share. And that cash is in the hands of two old-school vulture investors
looking to buy this bear market on the cheap.

Triarc's one remaining operating business is the Arby's restaurant chain.
Triarc owns no restaurants - they own a 3-4% royalty stream on the revenues
of the restaurants. That is a very low-risk bet. In 2000 they securitized
that royalty stream and borrowed $290 million non-recourse. That is the debt
you see on the consolidated balance sheet. If you look at the company on a
consolidated basis you miss this dynamic - Arbys with its $290 million of
debt is completely separate from the rest of the company which is essentially
$30 of cash. Management looks at it this way, and I agree with them. Arbys
with its debt is one business, worth what its worth. Entirely self
contained. The $30 of cash is separate.

A little background of how we got where we are. Triarc is the investment
vehicle of Nelson Pelz and Peter May, who own a controlling interest. They
have been a team for several decades, and their modus operandi is to do a
bunch of vulture LBO deals, work them out, sell for a big profit, and then
redeploy into the next round. You can look at a $25 share price as investing
alongside their next round of deals at 65 cents on the dollar they pay for
those deals.

Lets look at their track record. The big cash balance came from their last
big deal, possibly one of the best vulture deals ever. Remember when Quaker
took over Snapple? They paid I think over $2 billion, then completely
mismanaged it and wound up selling it for $300 million. Triarc was the
buyer. Pelz and May got Snapple growth going again, then packaged it with
their other low-rent beverage businesses they had bought on the cheap (RC,
Mystic) and sold it to Cadberry Schwepps for $1.5 billion last October.
Great buy, great sell - no question about it.

Net of taxes, that leaves $30 a share in cash on the balance sheet. Back to
the modus operandi - they are going to redeploy that into the next round of
deals.

Ordinarily, I don't like buying cash laden balance sheets if management is
going to throw it away on deals. But I'm invested alongside the guys who did
the Snapple deal - and that's not the only one. These guys have a long
history of making money for their partners. I attended a meeting with Pelz
and May last month and they are value investors to the core. Warren Buffett
emphasized in his last shareholder letter how important an advantage it is to
have cash when your competitors are dependent on a very tight high-yield bond
market. Triarc has cash, and the Buffett comment is not lost on Triarc
management - they know this is a buyer's market for what they are looking to
buy. They're looking for branded old-economy type businesses that they can
buy very cheap, and they like to have a sell kicker in mind.

The way Pelz and May look at the company and the way I do is this. Arbys is
kicking out free cash after its debt service which leads me to a valuation of
$5-10 a share for the operating business. Those close to the company would
probably tell you that is on the conservative side. Then you've got the $30
of cash - the debt is already accounted for in the Arbys valuation and is
non-recourse. I believe I own at least $37 worth of relatively easy to value
stuff in the hands of a management team that has proven its ability to create
value through financial acquisitions. And Mr. Market is giving me the
opportunity to buy their next round of deals for 65 cents on the dollar.

The risk is the integrity of Pelz and May, and of course their next deal.
They pay themselves very very well. The proxy will speak for itself on that
- these guys live large. They have the kind of reputation on Wall Street
that anybody who has been doing vulture investing for 30 years would have. I
have no doubt these are men who would sell their own mother, though I also
have no doubt their price would be a 20% IRR from what they paid for her.
They're vultures. In 1998 they tried to take over the company for much less
than it was worth (though that was a premium to where it was trading). IT
would not surprise me to see them throw in a bid for the whole company for
$30, which would be disappointing. But if my downside risk is a takeover bid
at a premium I can live with that. The real downside risk here is that they
do something stupid with the cash, but I am willing to bet on the track
record.

As you might expect for a company in the hands of vultures trading at the
valuation I believe it is, Triarc has been buying the crap out of its own
stock.

Catalyst