Description

Triarc Companies, Inc. (NYSE: TRY, TRY/B)

Triarc is a holding company that operates and franchises quick service restaurants under the Arby’s brand.  Arby’s was known historically as a purveyor of roast beef sandwiches, but has recently introduced many other offerings including other fresh sandwiches and salads.  Triarc also owns an interest in Deerfield & Co. which is a fixed income asset manager (read mortgage hedge fund).  Triarc is currently undergoing a restructuring whereby it is becoming a pure-play QSR owner and franchisor through divesting its interest in Deerfield and renaming the corporate entity Arbys, Inc.

Triarc is currently suffering from incredible misunderstanding of its business prospects.  The company, which was Nelson Peltz’s investing vehicle before he started his Trian hedge fund, is undergoing a transformation through which it will become Arby’s, Inc.  One of the knocks against the stock historically was its holding company structure and lack of visibility in its underlying subsidiaries.  The recent concern has to do with its interest in Deerfield.  No equity investor seems to want anything to do with a mortgage hedge fund today (I can’t say that I blame anyone for that sentiment).  HOWEVER, Triarc is insulated from the exposure.  Its ownership represents a 64% interest in the management company of the fund.  Triarc DOESN’T have its own capital at risk.  Also Triarc is currently trying to monetize its investment by selling its interest to Deerfield Triarc Capital Corp. (NYSE: DFR).  While a price was agreed upon earlier in the year, the process has been delayed by recent volatility in the credit and mortgage markets.  Triarc has announced that it may renegotiate the price or spinoff the interest directly to shareholders.  Triarc is also one of the potential bidders for Wendy’s (NYSE: WEN).

 

Here’s what I think the market misunderstands:

1. TRY’s interest in Deerfield & Co. may be worth zero, but doesn’t have negative value
2. Arby’s is one of the best QSR operators in the industry; this will become more obvious as a standalone company and with access to the Arby’s management team
3. Assuming the worst and zeroing out Deerfield’s value still implies an EV/EBITDA multiple of Arby’s of only 6x pro forma LTM.;  the peer trade at 10-11x EBITDA
4. At first blush, the company seems to have significant leverage; the debt that is consolidated on the balance sheet is franchise level debt which is non-recourse to TRY and therefore SHOULDN’T be included in enterprise value; it is accounting convention
5. The current holding company operating structure is saddled with corporate expenses which will virtually be eliminated by the restructuring; the company’s current headquarters at 280 Park Avenue is the office for Trian

 

What’s staggering is anytime the market gets the slightest hint that Nelson Peltz is buying an interest in a company (e.g., WEN, HNZ, TIF, KFT, CBRY LN, etc), the stocks tend to react favorably.  Here you have a situation where Peltz and his top lieutenant Peter May collectively own over 25% of the company.  While TRY may represent a smaller dollar investment than many of the investments in Trian, my bet would be that Peltz will do everything he can to realized value in this situation.  I don’t think the company does itself any favors by doing a pretty poor job in investor relations.  Ann Tarbell seems to be the IR contact in name only.  From what I understand, her main responsibilities are with Trian now.  I would encourage anyone doing work to try to get a call back (212-451-3030).  Hopefully you’ll have better luck than I did.

For the purposes of my analysis, I am assuming zero contribution in earnings or value for Triarc.  I am also assuming no transaction with WEN.

 

Valuation:

Market Cap:                 $1,000 million

Net Cash:                     $125 million

Enterprise Value:          $875 million

 

Arby’s Revenue:           $1,100 million

Arby’s EBITDA:          $144 million (1)

 

EV/Revenue:                0.8x

EV/EBITDA:                6.1x

 

(1) Assumes $12 million in services expense to Triarc;  I am assuming most of the corporate overhead pro forma for the restructuring stays with Trian;  this doesn’t assume the generous payout to Peltz and May which will not be ongoing

 

 

Comps:

Importantly, the pure-play QSR comps trade at significantly higher multiples of EBITDA.  While one can argue the specifics of which comps are the most appropriate because of the differences in owned vs. franchised operations, etc., Triarc trades at significantly lower multiples than ALL the comps.

 

MCD:              11x

WEN:              16x (acquisition premium and depressed margins)

YUM:              12x

THI:                 16x (more of a pure franchise model)

CKR:               7x

SONC:            10x

DPZ:                11x (includes significant commissary operations)

 

Price Target:

Given the quality of the brand and operations, I think Arby’s should trade at 10x EBITDA which would imply a price target of about $17 (about 60% upside).  Amazingly, this is where the stock traded in June of this year.  This is purely on an Arby’s basis ONLY.  Assuming the value gets realized for Deerfield that would obviously add incremental value (I hazard to guess what it will be worth).  There is also a couple of dollars in value in NOLs if you want to get academic.

 

Catalyst

1.TRY announces with finality how it will shed its interest in Deerfield & Co. either through a renegotiated sale to DFR or a spinoff removing the overhang
2.Resolution of WEN bidding (seems to be on hold because of recent credit issues)
3.The company officially changes its name to Arby’s, Inc. and makes the senior management team available to investors
4.Arby’s comps accelerate next quarter due to new product marketing initiatives
5.Sell-side restaurant analysts initiate research coverage on the new company; many analysts have avoided coverage because of the holding company structure; only C.L. King covers the stock