Wendy's/Arby's Group to sell Arby's to Atlanta-based Roark Capital Group

Roark's portfolio includes Moe's Southwest Grill, Schlotzsky's and Wingstop among other restaurant and franchise chains. Roark, with $1.5 billion of equity capital under management, will take a shot at reversing the long-term decline of Arby's when the deal closes, which is expected to happen in the third quarter. It is unclear whether, or how quickly, diners will notice changes at the 3,600 Arby's restaurants around the world.

The deal, valued at $430 million, will break up a fast-food company that was formed only three years ago and struggled to reach its full potential. It will rid Wendy's/Arby's of operating losses from Arby's that reached $35 million in the year ending April 3, as well as interest expenses that reached $20 million. Wendy's/Arby's will still have considerable debt -- $724 million in the first quarter -- even after shedding Arby's.

About 40 jobs at the Wendy's/Arby's headquarters will be eliminated, but more than 300 people will either join Roark or stay with the Wendy's brand in Atlanta. The headquarters of the Wendy's brand will remain in Ohio.

Much remains to be done before Arby's can "achieve its full potential," in the words of Roark managing partner Neal Aronson. About 10 percent of Arby's franchisees are having trouble making rent or royalty payments, a number much higher than the industry average.

"The problems with Arby's are pervasive," said Phillip Juhan, restaurant analyst at BMO Capital Markets. "This isn't a short-term fix. This is a long-term fix. They can reposition the brand, but it's going to take capital and time."

Wendy's/Arby's Group will keep a 18.5 percent ownership stake in Arby's. Wendy's/Arby's Group will get about $130 million of cash and Roark will assume about $190 million of Arby's-related debt. Selling Arby's will trigger an $80 million income tax benefit for Wendy's/Arby's, whose remaining equity stake in Arby's is valued at $30 million.

Earlier this year, Wendy's/Arby's said it planned to explore alternatives, including a sale of Arby's, to allow it to focus its resources on the larger Wendy's brand, which has seen sales and profit margins decline in recent quarters. The parent company wants to update the core menu at Wendy's, modernize restaurants, add breakfast items, build new Wendy's restaurants in the U.S. and expand globally.

Meanwhile, Arby's has posted six months of sales growth at established stores in the United States. Executives say that is an indication that the brand's turnaround plan, launched last year, is bearing fruit.

In an interview with The Atlanta Journal-Constitution, Roland Smith, chief executive of Wendy's/Arby's Group, said the company has proved doubters wrong by finding a willing buyer.

"The pundits said, ‘This isn't possible,'" he said of a sale. "Honestly, I always believed we would find a strong partner."

Roark executives "see the value of the brand and they have experience in running restaurants," he said. "The fact that they happen to be in Atlanta is just icing on the cake."

But both Wendy's and Arby's face serious challenges, said Vicki Bryan, senior high yield analyst at Gimme Credit. The cash earmarked to help jump-start Wendy's is less than one year of capital expenditures, she said. Arby's has suffered more than a decade of "persistent decline," she said.

"At least Arby's will no longer represent such a significant drag" on the earnings of Wendy's/Arby's, she said.

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