Mention the words “hedge fund” in the halls of the corporate headquarters for Wendy’s, McDonald’s, and CKE and you might get more than one dirty look. Last year, all three found themselves the target of activist hedge funds out to earn high returns through encouraging corporate restructuring.
Over the past several years, hedge fund managers have discovered that they can realize massive short-term gains by buying large blocks of stock in “undervalued” companies and pressuring management to make changes that will give stock prices an instant boost. Hedge fund managers scour the balance sheets of companies looking for ways to “unlock” value in companies through selling real estate, spinning off or selling subsidiaries or divisions, or otherwise increasing cash that can be put into the hands of investors.
Quick-service companies became the target of hedge funds last April 18 when Pershing Square Capital Management filed a schedule 13-D with the SEC announcing its acquisition of over 9 percent of Wendy’s stock over the previous two months. Pershing believed “that the market price of the common stock is substantially less than the intrinsic value of the issuer on a per share basis” and noted that the fund managers intended to meet with management about spinning off divisions, selling assets, and refranchising company units.
Pershing’s activity sent Wendy’s stock soaring but it didn’t sit too well with then CEO John Schuessler. According to William Ackman, managing member of Pershing, Schuessler refused his requests for a meeting and would not return phone calls. Schuessler told Ackman he was too busy running the company.
Pershing took the unusual move of hiring The Blackstone Group to provide financial advisory services. In a July letter to Schuessler, Ackman proposed spinning off Tim Horton’s, re-franchising company stores, and repurchasing shares with the proceeds. Blackstone contended that the company’s intrinsic value should be $60–70 a share rather than the $48 it was trading for at the time.
Ackman’s letter went unanswered. Less than three weeks later, however, Wendy’s announced that it would be initiating an IPO of Tim Horton’s to sell off 15–18 percent, sell company stores to franchisees, sell property to franchisees, close underperforming company stores, repurchase $1 billion in stock, and pay off $100 million in debt.
The larger press credited Ackman with the changes at Wendy’s but company spokesperson Denny Lynch told QSR in October that the company had been exploring the Tim Horton’s spin-off with advisor Goldman Sachs off and on since 2000 (Finance, October 2005). Lynch said a February 2005 investor conference brought the issue to the forefront again and led to the IPO decision. Coincidence? Maybe so. Nevertheless, Ackman quieted down after these moves.
If the story were to end there, we would have a classic example of investor activism, but in November 2005 master investor and all-around wealthy guy Nelson Peltz took an interest in Wendy’s. Peltz’ newly formed investment fund, Trian Fund Management, bought 5.7 percent of Wendy’s shares by April. The Peltz name might sound familiar—he’s the chairman and CEO of Triarc Companies, the holding company for Arby’s.
If Ackman’s interest in Wendy’s might questionably be short-term, Peltz’ interest could be serious. According to a recent 13-D filing, “Trian’s goal is to enhance shareholder value through a combination of strategic redirection, improved operational execution, more efficient capital allocation, and stronger management focus.” The 13-year ownership of Arby’s might be a good indication that Peltz could be in for the long haul.