Category: Articles

Okay, my last post on the topic as I have already spent way too much time posting on a company I have zero interest in. I do this because I think my arguments are being “summarized” in a way that does not accurately reflect the true nature of them.

In his post, Mr. Cohen states:

“The spin-off of Wendy’s from THI created value. Why? Because both organizations can now concentrate on maximizing value of their own operations. THI is a great chain that was for a long time masking the ineptitude of Wendy’s mgmt team.”

It created a shareholder profit, not value. Why could the two management’s not concentrate on doing this when the companies where together? Why is separation necessary?

Cohen: “To me, Sullivan’s argument boils down to the fact that Wendy’s (WEN) and THI should have stayed together because of the “synergies” that could be created by keeping them together.”

Yes, that and as I stated “Horton’s would have buffered Wendy’s shareholders while the management tried to fix it”

Cohen: “I think it’s mostly self-evident that there are few synergies between a Canadian doughnut chain and an American burger chain. THI has 2,700 locations in Canada and ~330 in the US. Wendy’s has about 7,000 locations in the US, and 370 in Canada. Are there really any synergies between these two in terms of “integration of logistics and getting product to locations?” I don’t really think so.

Wendy’s sells burgers and fries and meat and fish and potatoes. Horton’s sells coffee and tea and snacks and doughnuts and yes, sandwiches also. But cost savings from combined purchasing? The two chains don’t really sell similar stuff. I can see Dunkin Donuts and THI having cost savings from combined purchasing, but not a coffee & doughnut shop with a burger chain.”

Here is where his argument falls apart. Why, consider how Wendy’s is attempting to jump start sales. From Wendy’s site:

“Wendy’s is expanding its new breakfast menu to more than 75 additional restaurants in markets across the U.S. this month. This move comes after an extended test involving about 160 restaurants in five markets.

The Company is on track with the planned timing of its breakfast expansion, and expects to offer breakfast in more than 650 restaurants by the end August.

“Breakfast is the fastest growing business segment in the quick service restaurant category; and, we’re raising the bar by introducing a fresh, delicious, premium-quality breakfast menu,” said Wendy’s Chief Executive Officer and President Kerrii Anderson. “We believe it’s a better breakfast, and the positive customer reaction that we’ve received so far bears this out.”

As part of its breakfast menu, Wendy’s will be the only major quick service restaurant or convenience store chain to offer a proprietary blend of Folgers® Gourmet Selections™ coffee.”

Now, I am sorry but “Folgers” and “gourmet” belong in the same sentence only slightly more than “spam” and “gourmet” do. How much better would that sentence be with “Tim Horton’s Gourmet Coffee” instead of Folgers? How many more people would be willing to partake in a Wendy’s breakfast if the coffee they are serving did not remind them of the “extra screws” can in their father’s and grandfather’s garage? How much more “value” would Tim Horton’s coffee bring to the equation? Now, if I am out and want breakfast and coffee, I will not go to Wendy’s for the Folgers, even though I have a positive mindset towards their food quality, I will go to McDonald’s (MCD) for the Newman’s Own coffee. How many other people out there feel that way? I would argue a ton.

Cohen: ” McDonald’s introduced premium coffee that was branded McDonald’s. Wendy’s can introduce premium coffee that’s branded Wendy’s. The ability for Wendy’s to introduce premium coffee in cups that say Tim Horton’s doesn’t really justify keeping the conglomerate together. They can always license the THI name if they think it will help. If you read this Wall Street Journal article, though, you’ll see that Americans in general don’t really recognize the Tim Horton brand, so I don’t think it would really help Wendy’s to introduce Tim Horton-branded premium coffee in its 7000 US locations.”

Again, just untrue. McDonald’s coffee was not only NOT branded McDonald’s it was branded, advertised and sold as “Newman’s Own”. For proof take a look at this cup of iced coffee, if you look hard enough at the bottom you can see the McDonald’s logo, barely visible. As for American’s “not recognizing” Tim Horton’s, I would not expect folks in Tuscon, 2,000 miles away from the closest Tim Horton’s to recognize it, but, the same poll taken in areas where Horton’s does business would yield starkly different results. There is a reason Dunkin Donuts has not entered those markets yet.

Cohen: “Sullivan also claims that the Wendy’s management could have handled THI and Wendy’s together because there’s no reason why management can’t “walk and chew gum” at the same time. I would argue that if the management team (which by the way has already changed its CEO since then) couldn’t handle Wendy’s properly, they would’ve eventually screwed up THI also.”

This fails to recognize that the chains had separate management.

Cohen:”Sullivan argues that “everyone knew the burger chain was mismanaged” before the THI spin-off “and if they did not, they just did not look into the company very well before they bought shares.” I don’t really agree with that statement. Until Bill Ackman and Nelson Peltz came onto the scene, it didn’t seem like shareholders really cared about management ineptitude. Both Ackman and Peltz pushed for the spin-off to create value. Peltz, by the way, has significant experience in the restaurant field and he still holds Wendy’s shares today, indicating that he thought and still thinks that the spin added value. Now that Wendy’s is a stand-alone entity, Peltz can get his hands dirty with either fixing the company himself (which Wendy’s management is doing its best not to do) or getting it sold off. None of this would’ve happened without activist shareholders urging a spin-off. Certainly a purchase of Wendy’s would have been much harder to pull off if it was an entire conglomerate.”

I will not speak for the thousands of Wendy’s shareholders and what they did or did not think but I will say that a cursory look at the company would have revealed the burger chain was not doing very well. I will say most people knew Wendy’s was in third place in a 3 horse race vs. McDonald’s and Burger King. I will address the Peltz issue at the end.

Cohen:”As Whitney Tilson writes in this FT article (.pdf) from last year, “with the stock in the high $30s, the company?s Tim Hortons subsidiary was worth nearly the entire stock price.” Well, if that was the case, why wasn’t the stock trading higher? It all boils down to transparency. That, after all, is why spin-offs outperform the market almost all the time.”

Again, not really. Now it is true that percentage wise, spin do outperform the market. But, one cannot just blindly invest in spin offs and expect to beat the market. For instance if we have three spin offs that perform 25%, 8% and 8% and the market does 10%, the average gain for the spins was in excess of the market even though 60% of them did not beat it. I believe the actual % of spins that beat the market is around 60%, a far cry from “almost all”. Now, the transparency argument. Mr. Tilson also argues that Warren Buffett’s Berkshire Hathaway (BRK.A) is undervalued. Is there a more transparent company out there? Is Mr. Cohen advocating Berkshire start selling off assets to “unlock” this value? Or, should we wait for the market to recognize the true value of Berkshire and price shares accordingly? Isn’t this after all the very essence of Buffett’s style of value investing? Are we going to argue against his results?

Cohen:”In this case, keeping Wendy’s and THI together didn’t make sense. And hey, you don’t believe me? Ask Nelson Peltz. He has much more experience with both value investing and restaurants than either Sullivan or myself. He both supported the spin-off and continues holding the stock. I couldn’t ask for better proof than that”

What happened to Mr. Ackman? You cannot in one post trumpet Ackman’s beliefs and activism and call him a “long term investor” and then casually omit he dumped his stake in Wendy’s when you are trying to make a point about why holding Wendy’s shares is a good idea. It should also be noted that Ackman’s stake was nearly twice the size of Peltz’z current one (9% to 5.5%)and that he no longer holds Tim Horton’s shares either. Since we are throwing famous investors names around, let’s not forget George Soros dumped shares in both Wendy’s and Tim Horton’s after the spin along with Ackman.

I think the fundamental disagreement we have is what “value” means. I believe to Mr. Cohen it means “what can I get for my shares today” while to me it’s means “how much will they appreciate over the next several years”. This is why I have advocated Andrew Liveras NOT sell Dow Chemical, (DOW) because I believe the value of it long term is multiples of the $15 to $20 a share quick hit I would get from a sale. I believe Wendy’s long term would have made more money for shareholders with Tim Horton’s than without, especially when you consider the push they are making into breakfast which is what Horton’s really does well. It was a natural fit for the two.

Alas, we will never know “what could have been” for Wendy’s but one thing we do know, Ackman and Soros seem to believe the valuations of both companies no longer present investors with a “value” nor are they optimistic enough about the separate entities to continue to own shares.