19 January 2006

Wendy's and Tim Hortons Spinoff Updates

Wendy's (WEN) is in the midst of quite a run-up, from the low $40's in October to around $57 today. Versus its competition, WEN has a high PEG of 1.94 and very low ROE/ROA numbers, among others. WEN is too expensive, unlike its value menu cheeseburgers and finger-free chili. But if you own WEN stock, you will soon own shares of THI:

Wendy's will first sell up to 18 per cent of Tim Hortons in an IPO that is expected to put up to $600-million (U.S.) in the company's till. Shortly after that debut, Wendy's plans to give its shareholders new stock that represents the remaining 82-per-cent stake in Tim Hortons, according to investment bankers working with the Dublin, Ohio-based burger chain.

So should I buy WEN in order to get some THI? The Globe and Mail says no:

Many of Wendy's major shareholders are hedge funds and are expected to quickly sell their Tim's shares into the market.
"Wendy's is going to use the strong Canadian demand for Tim Hortons shares to get a premium valuation on the IPO, then spin out the rest of the company as quickly as possible," said one Canadian financer working on the deal.

I'm thinking a potential time to get into THI is shortly after the IPO, not by buying an inflated, bloated red-head with pigtails.

Here's some more informative grist from the piece:
Tim Hortons commands a premium valuation because the company's mix of double-double coffees and crullers has posted impressive sales growth on both sides of the border. Same-store sales were up 5.8 per cent in Canada and 6.7 per cent in the U.S. during the last three months of 2005.

In contrast, Wendy's fourth-quarter U.S. same-store sales, or sales at stores open at least a year, fell 2.9 per cent at company-owned outlets and were off 1.9 per cent at franchises, the chain's fifth successive quarter of declining sales. In a recent filing with the U.S. Securities and Exchange Commission, Tim Hortons outlined its dominance of the Canadian marketplace, saying that it represents 74 per cent of the coffee and baked goods sales in the quick-service sector.

Tim Hortons stock is expected to start trading in March on the Toronto and New York stock exchanges, under the symbol THI. Investment banks RBC Dominion Securities Inc. and Goldman Sachs & Co. are leading the Tim Hortons IPO.

Tim Hortons earned $157.5-million in profit in 2004, or roughly $1.36 a share, according to research conducted by analyst Larry Miller of Prudential Equity Group LLC. In a note last month, Mr. Miller suggested that with a $600-million IPO, Tim Hortons shares could be worth between $29 and $36 apiece, with individual Canadian investors stepping up to the counter for stock. "It's a Canadian demand story," Mr. Miller said. "Retail-wise, it's going to be zero in the U.S."

Even Cramer is wary of Tim Horton's:

A viewer said that he was thinking about staying away from Wendy's initial public offering of its Tim Hortons doughnut chain because it is being offered in installments. Cramer agreed, saying he'd hold off on that IPO too.

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