Columbus, Ohio-based Wendy’s International Inc. is making a smart move with its recently announced acquisition of the Thousand Oaks, Calif.-based Baja Fresh restaurant chain, analysts say. In a deal scheduled for completion this month, Wendy’s will spend $275 million in cash for the 10-year-old Baja Fresh fast Mexican food chain, which includes 169 stores in 16 states and revenues of $78 million.
The transaction fits into Wendy’s CEO Jack Schuessler’s strategic plan to invest in the fast casual food sector (a combination of fast food service with casual dining food quality.) Wendy’s already purchased 2,000-store coffee and bakery chain Tim Hortons’ to make inroads into the fast casual market.
The Baja Fresh deal will take the company even further towards boosting its long-term growth rate, according to Wall Street analysts. "We view this $275 million deal as the ‘right size’ — big enough to matter but small enough to represent no strain on Wendy’s stellar balance sheet," Bear Stearns restaurant analysts Joseph Buckley and Ashley Reed said in a written in report on the deal released earlier today.
Credit Suisse First Boston analyst Janice Meyer agrees. "Though expensive, we think the company is wise to spend the money on something that is working, rather than buying something that is cheaper and less proven, that may not result in a successful new concept," Meyer wrote in her report on the transaction.
"Most restaurant companies are fearful of dilution and convinced they can develop the next great concept themselves. The landscape is littered with names from the best companies that never made it big, such as Grady’s and Spageddies from Brinker, China Coast from Darden, Rio Bravo from Applebee’s, and we believe there are more in the making."
When the deal is completed, Baja Fresh will become a wholly owned subsidiary of Wendy’s. The company expects to finance the acquisition with $50 to $100 million in cash and $175 to $225 million in new, long-term debt.