Wendyâ€™s Credit-Market Indigestion

Chicago food reporter Janet Adamy provides this update on the latest Wendy’s news.

null The drawn-out sale process for WendyÂ’s International is now hinging on what kind of staple financing the chainÂ’s advisers can provide in a shaky credit market.

Two groups of buyers, described in this story , as well as Triarc Cos., are prepared to participate in the next round of the sale process. But that canÂ’t start until Lehman Brothers and J.P. Morgan give them the terms of the so-called staple financing that potential bidders say the firms are working to arrange.

Staple financing is seller-provided financing for a deal that is “stapled” onto a memorandum describing the company, much like a car dealer offering to fund a new car purchase.

That process is taking longer than prospective buyers had anticipated, according to a person familiar with the situation. And if that financing is either unfavorable or doesnÂ’t come through, buyers who might have had other backers a few months ago have far fewer options today. Indeed, a number of other “staples” have disappeared from other deals over the last few months, leaving many bankers to call them “paper clips.”

Â“ItÂ’s going to be a massive premium for the cost of this money,Â” says Gene Carlisle, a longtime WendyÂ’s franchisee in Memphis with almost 100 locations. Â“It makes it very, very difficult.Â”

Mr. Carlisle says heÂ’s had Â“lengthy, lengthy discussionsÂ” with private equity firms about possibly making a bid for the chain. He says he could end up participating in the sale process by partnering with at least one private equity firm (he declined to name who heÂ’s speaking with) but that no arrangements have been finalized.

His hesitation: Â“Whoever buys it is going to pay too much,Â” Mr. Carlisle says. Investors overestimate how much a new buyer could improve WendyÂ’s profit margins, he says. Record-high commodity prices add another layer of pressure. Mr. Carlisle says heÂ’s concerned that a buyer will take on so much leverage to acquire the chain that they wonÂ’t have money to do things like remodel WendyÂ’s tired-looking locations, of which he says about half need major renovating.

Unlike other potential bidders, whoÂ’ve thrown out prices thatÂ’d value the chain between $3.2 billion to $3.6 billion, Mr. Carlisle believes WendyÂ’s fair market value is closer to $2.5 billion. He calls that number just the opinion of a Â“burger flipper.Â” But investors may pay attention to his estimate since Mr. Carlisle is among WendyÂ’s most respected franchisees.

The dealÂ’s reliance on staple financing is a sharp turn from just two months ago, when Triarc chairman and WendyÂ’s investor Nelson Peltz complained about the staple as described here (Â“Peltz Has No Stomach for WendyÂ’s Staple”).

ItÂ’s not clear what the financing might look like, but a person familiar with the matter say itÂ’s likely to be complex. One possibility is that it would involve the sale and leaseback of some company real estate. Once the advisers provide the terms of the staple financing, bidders will have two weeks to submit their bids, the source familiar with the matter said.