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Is Wendy’s a buyer or a seller?

The burger chain, beset by regular merger reports, believes it has plenty of growth without buying or selling, says RB’s The Bottom Line.

The Bottom Line

During Wendy’s Investor Day presentation, an analyst asked CEO Todd Penegor whether the company is a potential buyer or a potential seller of restaurant chains.

Penegor answered pretty simply.

“I don’t think we’re either,” he said.

Wendy’s future has been subject to a healthy dose of speculation for some time. It’s a stand-alone restaurant chain in a time of consolidation. And it’s also the smallest of the Big Three. McDonald’s is the largest restaurant company in the world. Burger King is part of Restaurant Brands International (RBI). But Wendy’s is on its own.

Last year, the company was in talks with Papa John’s about a potential merger before founder John Schnatter admitted using a racial slur and resigned. How serious those talks were, of course, is not entirely certain.

On the other end has been routine speculation about Wendy’s itself getting sold. The company for years has been subject to rumors that it would be sold to Yum Brands. Such a deal would make sense, because it would give Yum a burger chain and Wendy’s access to a top-notch international development team.

Yet Penegor believes Wendy’s has plenty of growth in the coming years to avoid both buying and selling.

“There is so much growth out in front of us,” Penegor said. “And if you want to go to the flip side: Would someone come in and acquire us? Well, when we execute this plan and keep driving the financial returns we believe we can drive, I don’t think somebody would want to come and buy us because our story is so compelling as a stand-alone Wendy’s.”

To be sure, most of the biggest deals in recent years began when a buyer looked at a potential target and approached the company. Neither Tim Hortons nor Popeyes Louisiana Kitchen were for sale when what is now RBI bought them.

It’s entirely conceivable that someone could step in and make such a strong bid for the company that it has little choice but to listen.

So far, however, that has yet to happen, and the higher Wendy’s stock goes, the less likely it is that someone like Yum makes a run at the company.

As for Wendy’s buying something else, the company’s own history operating multiple brands (Tim Hortons, Arby’s, Baja Fresh) doesn’t exactly inspire confidence in a return to those days.

And Wendy’s strategies can give it plenty of growth without resorting to any sort of acquisition, anyway.

Consider that the company believes it could get breakfast up to 10% of sales in relatively short order. That would make it a profitable, $1 billion business for the chain, which last year generated $9.4 billion in U.S. system sales, according to Technomic.

In addition, Wendy’s believes it could add another $1 billion in sales by 2024 through more international growth, both through same-store sales and new unit development.

Add those two together, and assume another $1 billion in domestic sales, and Wendy’s has the potential to add $3 billion to its system over a five-year period. To put that into context, that alone is more than the domestic 2018 system sales for Papa John’s.

It wasn’t that long ago that investors were pushing restaurants to go it alone as Wendy’s is now. That there is some pressure on the chain to become part of a larger organization demonstrates just how much the dynamic in the industry has shifted.

Wendy’s can definitely go it alone and go all in on its existing brand. But if it doesn’t hit those ambitious goals, then pressure to join the multibrand fray will only intensify.

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