Will Wendy's bite into Krispy Kreme?

The doughnut chain, with nearly 550 locations around the world, saw its share price plummet from a high of nearly $50 in 2003 to a low of $1.15 earlier this year. Shares closed Wednesday at $3.25, giving the company a market capitalization of only $219 million.

The Columbus Dispatch
November 26, 2009

Will Wendy's bite into Krispy Kreme?
Dan Gearino

With Wendy's/Arby's already indicating it would like to buy another restaurant company, a possible target has emerged: Krispy Kreme.

The rumor surfaced on Breifing.com and then was reported by Barron's.

Such an alliance would be familiar territory for Wendy's, which bought doughnut and sandwich maker Tim Hortons in 1996 and then spun it off in 2006. Wendy's was acquired by the parent of Arby's last year to form Wendy's/Arby's.

Regarding the reports about Krispy Kreme, Bob Bertini, spokesman for Wendy's/Arby's Group, said: "We do not comment on rumor or speculation."

Previously, Wendy's/Arby's had indicated that it was looking to add a brand, which is one reason that the industry news media and analysts aren't dismissing the rumor.

But that doesn't mean the prospective deal is a good idea.

"The question of whether (Krispy Kreme) would add value long term is tied directly to the strategy post-acquisition," said Paul Huffman, managing director for Hadley Partners Inc., an investment bank.

If a new owner wanted to expand Krispy Kreme, it would have to be mindful of how overexpansion affected the brand in recent years, he said.

The doughnut chain, with nearly 550 locations around the world, saw its share price plummet from a high of nearly $50 in 2003 to a low of $1.15 earlier this year. Shares closed Wednesday at $3.25, giving the company a market capitalization of only $219 million.

Huffman thinks the greatest return for Wendy's/Arby's is to focus on its existing business.

"Given the size and scale of Wendy's/Arby's, even small improvements to margins, costs, revenue, etc., have a major dollar impact to the business," he said.

Wendy's/Arby's might be better off looking in other places for acquisitions, said Peter Romeo, who covers restaurant chains for trade publications and on his blog. "There have got to be a lot of younger, fresher and more premium brands out there," he said.

Among the possibilities are beverage chains such as Jamba Juice and regional chicken or pizza brands, he said.

The mere existence of merger rumors shows that credit markets are improving, said Morgan McGowan, associate economist at Moody's Economy.com. "Now we're in a position where economic conditions are still weak, but credit conditions are easing," he said.

That combination of factors makes this fertile ground for mergers.

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