Fund Takes Big Bite of Wendy's

Tables: Buyers | Sellers

A DAY AFTER Wendy's International agreed to sell itself to the parent company of rival Arby's, owned by longtime activist-investor Nelson Peltz, a hedge fund announced it had taken a bite out of the fast-food company, amassing a 15% stake.

On Friday Pershing Square Capital Management disclosed that it now owns 13,087,000 shares in the Dublin, Ohio-based company. The fund is known for its activism but filed as a passive investor, listing March 10 as the date they reached the ownership threshold that triggered the disclosure.

At the end of the fourth quarter, Pershing had no listed holdings in Wendy's, but it is now the company's largest shareholder, edging out Peltz, who owns a 9.8% stake through Trian Partners.

William Ackman, who heads Pershing, has worked with both Peltz and Wendy's before. Ackman amassed a stake in Wendy's in 2005 and began agitating for change, not long before Peltz joined the fight. However, after Wendy's spun off donut chain Tim Hortons, Pershing cashed out of its stake, while Peltz continued to push for more improvements.

A spokesman for New York-based Pershing declined to comment on the stake.

Wendy's did not return phone calls seeking comment.

"Had they wanted to go activist here they would have filed as an activist shareholder," says Ben Silverman, director of research at InsiderScore.com. "I think that this was more of a move to support Triarc's [takeover]."

On Thursday, Wendy's said it agreed to be acquired by Triarc Cos., which is also controlled by Peltz, for about $2.4 billion in stock, or $26.78 a share. The price is a 6% premium to the stock's close on Wednesday. Each Wendy's share will convert to 4.25 shares in the new company, which will keep the Wendy's name. Peltz will be on the board of the new company.

"My feeling is that Ackman, knowing that Peltz was getting more agitated by the day, saw an opportunity here to build a large stake to help Peltz in a deal if there were a proxy fight or if the transaction needed to be voted on," says Silverman. "And he also felt that there was value and profits to be made here, as his shares will give him a stake in the new combined company."

Silverman says Ackman is comfortable owning the stake with Peltz's leadership, but he may not be a long-term investor.

"I think he has more of a midterm focus," he says. "He's willing to buy and hold, but there have been plenty of times he's bought into a company, rattled the cage and gotten out and did so with a profit, like [his involvement] at McDonald's."

Wendy's stock is down 24.5% in the last 12 months, while the Dow Jones U.S. Restaurants and Bars Index lost 1.9%. However shares have shot up 10% year-to-date, as the company's yearlong search for a buyer came closer to fruition.

Shares rose 44 cents to $28.87 Tuesday.

As Ackman and Peltz have been adding to their stakes, other institutional investors have been getting out of Wendy's, according to Joshua Hong, director of research at OwnershipAnalyzer.com

"Overall institutions that held [Wendy's] decreased in the past one to two years with low turnover of about 20%-30%," he wrote in an e-mail to Barron's Online. However, Hong says that the merger news and its outcome outweigh most other factors at this time.

On Thursday Wendy's also announced first-quarter earnings fell 72%, below analysts' expectations, as same-store sales also declined. However, due to the impending merger, the company did not hold an earnings conference call.