Flynn Restaurant Group’s path to purchasing NPC International met resistance last week when Wendy’s filed a limited objection stating that it hasn’t given consent for Flynn to operate any stores.

NPC, which operates almost 400 Wendy’s units and roughly 900 Pizza Hut stores, filed for bankruptcy July 1 with approximately $900 million worth of debt. The franchisee entered bankruptcy with 1,200 Pizza Hut units, but the operator and Pizza Hut agreed to close up to 300 underperforming locations, most of which were dine-in concepts.

Flynn—the largest restaurant franchisee in the U.S—submitted an $816 million bid to acquire all of NPC’s assets. A court approved the operator as the stalking horse bidder, which means that it sets the bar prior to the bidding process. Flynn’s bid is already significantly higher than NPC’s $725 million asking price. Flynn currently franchises Arby’s, Panera, Taco Bell, and Applebee’s.

Wendy’s took issue with the stalking horse bidder designation for multiple reasons.

The first problem is the break-up fees. If Flynn isn’t the winning bidder, it could receive a break-up fee as high as $20.4 million. Bidding procedure rules mandate that a qualified bid must be greater than cash purchase price and assumed liabilities plus the sum of any bid protections, plus $1 million. This essentially means that a bidder would not only have to overcome $816 million, but also another $21 million because of the break-up fee and additional $1 million.

“The Bid Protections are more likely to chill bidding than encourage it,” Wendy’s wrote in the filing. “… Moreover, the Bid Protections do not appear to be necessary to spur competition. The Debtors’ Motion reveals that many of the parties who have submitted indications of interest have done so for multiple regions. This suggests that the Bid Protections are not necessary to generate interest in the assets.”

To Wendy’s argument, the sales process has proven to be competitive. According to court documents, 26 active potential buyers have conducted due diligence for the Wendy’s assets and 32 active potential buyers have conducted due diligence for the purchase of the Pizza Hut assets.

The second obstacle is that Wendy’s hasn’t consented to Flynn’s potential ownership of 394 Wendy’s stores because it operates two main sources of competition, Panera and Arby’s. Flynn oversees 369 Arby’s locations and 137 Panera units. Wendy’s said that unlike other potential franchisees in similar situations, Flynn has indicated that it won’t sell its Arby’s and Panera assets. According to Wendy’s, the two sides also haven’t agreed on personal guarantees, reimaging and development obligations, store count limitations, or maximum leverage requirements.

“Wendy’s files this Limited Objection to make it clear that it has not consented to Flynn becoming a franchisee, let alone the largest franchisee in the Wendy’s system,” the court filing said.

In the filing, Wendy’s said that it has been actively involved in helping NPC identify potential bidders that are already approved or begun Wendy’s qualification process. Earlier in November, Wendy’s said in an SEC filing that it’s considering a consortium bid with a group of pre-qualified franchisees to purchase all of the Wendy’s assets. Wendy’s expects that existing and new franchisees would purchase most of the markets while Wendy’s would acquire one or two at the most.

In a response, Flynn acknowledged Wendy’s concerns by saying that each issue is solvable and that it looks forward to receiving consent in the near term.

Flynn also pointed toward Wendy’s willingness to work with Arby’s and Panera brands in the past. For example, more than 363 of the franchise agreements with NPC don’t name Arby’s or Panera as a competitor, Wendy’s has current relationships with franchisees that also own Arby’s and Wendy’s stores, the fast-food giant owned a significant equity stake in Arby’s through 2018, and Wendy’s has historical dual-branding efforts with Arby’s.

The franchisee said it has agreed to invest significant capital in both brands and other terms such as accelerated schedules for restaurant development, renovations, guarantees, and “operating covenants designed to alleviate stated competitive concerns and concerns about the relative size of the Flynn restaurant portfolio.”

While Wendy’s and Flynn sort out details, Pizza Hut has signed off on all business terms.

“As the largest or one of the largest franchisees for four of the nation’s leading brands, Flynn has a deep understanding of the responsibility of being the largest franchisee in a system and knows how to work in partnership with its franchisors,” court documents said.

Fast Food, Finance, Franchising, Story, Wendy's