Thursday, March 09, 2006

Triarc-Physician Heal Thyself

Nelson Peltz is gaining a tremendous reputation for his corporate activism.

There is a very long and very successful history here. Having been part of the financial revolution of the 1980’s, which under Michael Milken’s concepts, allowed financiers to acquire large companies through junk bond financing, Mr. Peltz gained control of Triangle Industries, National Can, and American Can. Within only a few years, Mr. Peltz sold the can manufacturing businesses to Pechiney for an $834 million profit in 1988.

He is known for the purchase of Snapple from Quaker Oats for $300 million, effecting a turnaround in the operations, and selling it three years later for $1.5 billion.

Most recently, he has rattled the management of Wendy’s and gained three seats on the board as well as expedited the restructuring of the business. Similarly at Cracker Barrel, Mr. Peltz has effected a potential restructuring of the business. Clearly, he now has Heinz in his sights.

Peltz has become the poster boy for restructuring, or so it seems.

In my view, the paramount issue that drives corporate activism is return on invested capital. Make no mistake about it…the only way that shareholder value increases in the long run is for the return on capital to exceed the cost of capital.

Let’s turn our attention to Triarc Companies(TRY,) a public holding company controlled by Misters Peltz and May. In an announcement last May, the company indicated that it was contemplating a restructuring. In June, further clarification:
“Triarc said today that it is continuing to explore a corporate restructuring that would separate Triarc's non-restaurant operations (primarily its ownership interest in its alternative asset management business, Deerfield & Company LLC) from Triarc, through a spin-off of such operations to Triarc's shareholders. Options for Triarc's other remaining assets are also under review and could include the allocation of Triarc's cash, cash equivalents, short term and other investments, including funds, between its two operations and/or a special dividend or distribution to shareholders.
If the corporate restructuring is completed through a spin-off of Deerfield, it is expected that Triarc would be renamed Arby's. As a result, Triarc shareholders would then hold shares in two "pure play" public companies: Arby's (formerly known as Triarc) which, after the completion of its previously announced acquisition of RTM Restaurant Group, its largest franchisee, would be a fully integrated stand-alone restaurant company, and Deerfield, an asset management business that has approximately $9.0 billion in assets under management.
In addition, Triarc announced today that its senior officers are continuing to actively explore the creation of one or more equity investment funds, which would be managed and owned by such officers, and which would be separate and distinct from Triarc and the spun-off businesses. A portion of the economics generated by the fund(s) may be paid to Triarc (which would be renamed Arby's) and/or Deerfield.”
Note the language! Note that the equity investment funds which have been used for the recent activism have been “separate and distinct” from Triarc and that a portion of the economics may be paid to Triarc and/or Deerfield.
November 1st marked the release of the 10-Q with the following “subsequent event” noted:
On November 1, 2005, the Executives and the Company's Vice Chairman (collectively, the "Principals") started a series of equity investment funds (the "Funds") that are separate and distinct from the Company and that are being managed by the Principals and other senior officers of the Company (the "Employees") through a management company (the "Management Company") formed by the Principals.
The Company has committed to invest $75,000,000 in an account to be managed by the Management Company that will co−invest in parallel with the Funds. The Principals and certain Employees have invested in the Funds and certain Employees may invest in the Funds or in an account to be managed by the Management Company. The Management Company has agreed not to charge the Company, the Principals or the Employees any management fees with respect to their investments. Further, the Principals and the Employees will not pay any incentive fees while Triarc will pay no incentive fees for the first two years and, thereafter, will pay lower incentive fees than those generally charged to other investors in the Funds.”

The good news is that at least Triarc shareholders can participate to a limited degree in what appears to be the primary interest of management. A $75 million participation out of a cash, cash equivalents, and short term investments total of over $1 billion seems disproportionately small.

We have agonized over the poor trends in return on invested capital that Heinz shareholders have faced. The returns on capital for Triarc, in my opinion, have been pathetic:

2000 2.8%
2001 1.4%
2002 -0.9%
2003 -2.0%
2004 0.2%
TTM -3.3%

Deerfield Capital appears to have grown at a rapid pace since its acquisition. My sense is that Arby’s itself is a well-recognized franchise whose value exceeds that of Triarc.

The complicated structure of Triarc, the deferred compensation and trusts of the principals, create unnecessary confusion for shareholders in my view.

To its credit, the company has started to pay a 15 cent special dividend in addition to its regular 8 cent dividend and contemplates paying another 30 cents in special dividends this year.

But when I look at the rapidity of change demanded of others, when I consider the long-promised restructuring, and when I contemplate the lack of progress in returns on capital, this seems to be a case of physician, heal thyself. What is taking so long?

I, my family and clients do not have a position in Triarc.


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