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Wendy's Unveils A Semi-LBO: Will Buy Back 50% Of Its Float

Tyler Durden's picture




 

When it comes to the short-termist financial gimmickry that is stock buybacks, the warning first issued here back in 2012 has now been repeated by virtually everyone from Blackrock's Larry Fink to Goldman Sachs (a firm which makes millions in commissions executing said buybacks).

Just overnight, Bloomberg had an article titled "Companies' Borrowing Spree Darkens Stock Market Future" in which it repeated the now well-known warnings:

A dark shadow is lurking behind the happy façade of rising stock prices.

 

U.S. companies are borrowing money faster than they’re earning it -- and they’re doing it at the quickest pace since the aftermath of the financial crisis.

 

Instead of deploying the debt to build factories, hire new workers or expand product lines, companies are funneling more of their money to shareholders or using it to fund deals. Stock buybacks reached an all-time high last year and the volume of global mergers and acquisitions announced so far this year would make it the second-busiest ever, according to data compiled by Bloomberg.

We showed this over 1 year ago as follows, when we crushed the pervasive conventional fallacy that corporate cash is record high - it may be, but so is net debt!

And as Bloomberg noted: "the debt undermines future growth and could dent company income when borrowing costs rise. Higher interest rates will make already indebted companies less desirable to lend to. The consequence: profitability, buoyed by cheap money since rates went to near-zero in 2008, will sink."

“Companies have said, ‘We don’t have an ability to grow organically, so we can distract shareholders instead,’” according to Jody Lurie, a credit analyst at Janney Montgomery Scott LLC, which manages $63 billion. “When they buy back shares, all it does is optically make earnings per share look better.”

And who can blame them? With the central planners' repressive regime in which it encourages the relentless issuance of debt (and which yield-starved bond investors eagerly gobble up with other people's money to justify their 2 and 20 fees), there is no other choice than to lever up massively and reward shareholders while handing all the long-term risk to bondholders.

Today Wendy's was the most recent to oblige, when the company with a $4 billion market cap and 3x net debt leverage announced it has authorized a new $1.4 billion buyback program, the biggest in its history, of which it would commence with an $850 million share repurchase as soon as today sending the stock 5% higher.

"Our recent operating results, along with the shareholder-value enhancing initiatives and updated outlook announced today demonstrate continued progress with our brand transformation," President and Chief Executive Officer Emil Brolick said. "The growth reflected in our long-term outlook, especially our expectations for steadily increasing Adjusted EBITDA margins, demonstrates the higher quality of earnings we are generating as a result of our system optimization initiative, which remains on track for completion in 2016. The enhanced earnings stream includes increased royalties and rental income from the 674 properties we own.... Our recent dividend increases and share repurchases, together with our new $1.4 billion share repurchase authorization, are important elements of our financial management strategy,"

Actually, launching a stock buyback program of this magnitude reveals just one thing: the company has no more organic growth opportunities and as a result it will rush to reward its activist shareholders, most notably Nelson Peltz who, as was to be expected, was quite excited: "We are very pleased with Wendy's on-going transformation and outlook," Peltz said. "Immediately following the sales, Trian will still be the Company's largest stockholder, based on current ownership information, and we look forward to continuing to work closely with other members of the board, along with Emil Brolick and his leadership team."

Of course Peltz is pleased: finally there is someone who can buy his mountain of WEN stock, which if he tried to sell in the illiquid open market would likely lead to another Hanergy-type outcome.

As for the Wendy's buyback program, here it is in context:

$1.4 billion in share repurchases is:

  • approximately the same as Wendy's total debt load
  • just slightly under the total revenue it is espected to earn in 2015
  • 3.5x greater than Wendy's LTM EBTIDA
  • and, most importantly, just about half of Wendy's entire stock float!

In other words, Wendy's is about to LBO itself... by half.

And at a pace of 2% of the entire S&P market float being bought back every year thanks to central bank policies, at this pace the entire stock market will have taken itself private some time in 2065.

 

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Wed, 06/03/2015 - 11:46 | 6159215 NoDebt
NoDebt's picture

I keep telling you guys, this whole damned shit show is being taken private.  All of it.  Just glad the Tylers put an end date on it: 2065.

Wed, 06/03/2015 - 11:47 | 6159229 knukles
knukles's picture

It's planning, development, capital investment and forward looking management .... of Financial Engineering

Wed, 06/03/2015 - 12:01 | 6159291 KnuckleDragger-X
KnuckleDragger-X's picture

Going ass to neck deep in debt to buy back stocks is brilliant...if your bonus relies on it. The road goes on forever.....

Wed, 06/03/2015 - 15:39 | 6160318 bmr22
bmr22's picture

And the party never ends, now who sings that song lolol REK

Wed, 06/03/2015 - 11:47 | 6159231 Oh regional Indian
Oh regional Indian's picture

Yup NoDebt, the snake is eating it's tail back in now.

Taking the goodies off the table...slowly but surely...

Wed, 06/03/2015 - 12:13 | 6159349 Doubleguns
Doubleguns's picture

On major hic-up and the bond owners take owner ship while the stock holders are tossed. Wonder if that is in the cards.

Wed, 06/03/2015 - 12:33 | 6159412 p00k1e
p00k1e's picture

How did that work out for senior debt holders of GM bonds? 

Wed, 06/03/2015 - 11:48 | 6159234 venturen
venturen's picture

That is quite a Whopper!

Wed, 06/03/2015 - 11:50 | 6159242 NoDebt
NoDebt's picture

Would you like to Super Size your share buyback today for an extra billion bucks?

Wed, 06/03/2015 - 11:52 | 6159252 Simplifiedfrisbee
Simplifiedfrisbee's picture

Leverage to maintain price levels. Another day at the office Jamie.

Wed, 06/03/2015 - 11:55 | 6159272 Seasmoke
Seasmoke's picture

So Wendy's now is a private hamburger joint again. 

Wed, 06/03/2015 - 11:57 | 6159275 Ajax_USB_Port_R...
Ajax_USB_Port_Repair_Service_'s picture

Wendy's is now an undervalued stock. The lipstick has been applied to the pig. Wendy got herself a boob job! EPS chartz gonna look sexy. Buy so the insiders can sell.

Wed, 06/03/2015 - 11:57 | 6159280 SERReal1
SERReal1's picture

They gotta do something to keep propping up this market. Buy moar stawks!

Wed, 06/03/2015 - 12:02 | 6159282 Kaiser Sousa
Kaiser Sousa's picture

try explaining this bullshit to a brainwashed dumb ass amurican who thinks he's getting rich off his 401k or alternative reitrement plan casue the Dow keeps goin up, up, and up driven by this cocksuckery....

GOOD LUCK BITCHEZ.

Wed, 06/03/2015 - 12:01 | 6159294 madbraz
madbraz's picture

this game ends as there is a limit to balance sheet leverage that can be had - whoever is a leftover stockholder will be crushed.  prices moving forward should reflect that, they should imply a single-digit multiple as the end game approaches on buybacks.  in other words, a 50% correction.

Wed, 06/03/2015 - 12:04 | 6159306 disabledvet
disabledvet's picture

If they actually wanted more customers they could add a place to plug in your car thus giving folks a reason to come in and eat their grub.

Heck maybe they could even lower prices...

Wed, 06/03/2015 - 12:07 | 6159313 SillySalesmanQu...
SillySalesmanQuestion's picture

But, but, how can they afford NOT to do it...
Debt is cheap and plentiful, hell, by next year , they might even be able to roll it over at a negative interest rate...

Wed, 06/03/2015 - 12:06 | 6159315 NoDebt
NoDebt's picture

I wonder what Wendy's "price to equity" ratio will be after this?

Wed, 06/03/2015 - 12:06 | 6159317 yogibear
yogibear's picture

Why produce/mkt anything just borrow cheap money and buy the shares back.

As shares become scarce IPOs just go ballistic. 

 

Wed, 06/03/2015 - 14:32 | 6160047 Ludwig Von
Ludwig Von's picture

I thought "Nuclear" :-)

Wed, 06/03/2015 - 12:08 | 6159332 Immortal Flatulence
Immortal Flatulence's picture

How's this for an idea. If they pay out any held cash to shareholders, it's gone, and they no longer control (which is what should happen in the first place, WE investors deserve it). Instead, they hold the cash, or use it for buybacks when the market already inflated (dumbass for sure). What senior management is doing, is serving their own self interest. Buybacks now end up keeping the bubble inflated, and therefore their net worth uinflated. Yet another way they cost investors OUR returns. Ben Graham was right on the money about this.

Wed, 06/03/2015 - 12:10 | 6159336 Immortal Flatulence
Immortal Flatulence's picture

inflated*

Wed, 06/03/2015 - 21:01 | 6161431 Bemused Observer
Bemused Observer's picture

How about this...how about management have a primary duty to keep the company healthy and functional? NOT THE STOCK, the company.

I know it sounds crazy, but it just might work...

Wed, 06/03/2015 - 12:11 | 6159339 Bemused Observer
Bemused Observer's picture

They're eating themselves alive...It won't be long now. The destruction that SHOULD have happened after 2008 hasn't been avoided, merely postponed.

Bad businesses that DIDN'T go down in 2008 are now in the process of doing to themselves that which they tried so hard to avoid.

With no growth, no sales and growing debt, a lot of companies will be going away, and in the process they are using up all those gains to tread water...so, the wealth destruction happens after all. Just a bit later than you thought.

Eventually, I suppose enough dead wood will be cleared, one way or another.

Wed, 06/03/2015 - 12:30 | 6159402 Immortal Flatulence
Immortal Flatulence's picture

BO, you're so right.

Wed, 06/03/2015 - 12:25 | 6159384 gwar5
gwar5's picture

They have delicious burgers.

Wed, 06/03/2015 - 12:32 | 6159410 p00k1e
p00k1e's picture

These stock buybacks make the best argument for a debt jubilee.

Wed, 06/03/2015 - 15:53 | 6160363 Arnold
Arnold's picture

'Burgers on the house' Day

Wed, 06/03/2015 - 13:22 | 6159685 juggalo1
juggalo1's picture

Why are you surprised that leverage is at an all time high when interest rates are at an all time low?  Also I know you are being facetious, but you still shouldn't confuse stupid people.  Q: After a company has bought back 50% of its own stock, what percent of the company's float is held by shareholders?  A: 100%

Wed, 06/03/2015 - 14:17 | 6159979 kchrisc
kchrisc's picture

Borrow Zion's banksters' counterfeit poison to boost EPS, which then boosts the stock price that Zionists can then later harvest for Zion. When the music stops, Zion's banksters can then take possession of the business and its assets with claims generated by way of their counterfeit. All the while, because of Zion's banksters' counterfeit, the people pay higher prices at the grocery store, and have fewer economic opportunities by which they can work and earn to pay those higher prices.

Did I miss anything?

Liberty is a demand. Tyranny is submission..

 

I lifted a rock: https://en.wikipedia.org/wiki/Nelson_Peltz#Early_life_and_education

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