Wendy's auction hurt by funding problems: sources

By Jessica Hall and Michael Flaherty

PHILADELPHIA/NEW YORK (Reuters) - Wendy's International Inc. (WEN.N) is expected to get tentative takeover offers on Monday, but a final sale of the hamburger chain may be delayed or canceled as suitors struggle over price and funding, sources familiar with the situation said on Monday.

Activist investor Nelson Peltz, who leads Arby's parent Triarc Cos Inc. TRY.N, will likely submit an offer for Wendy's by Monday's deadline, the sources said. Peltz declined to comment.

Wendy's franchisee David Karam has been working with buyout firm Oak Hill Capital Partners on a potential bid, the sources said. Private equity firms including Thomas H. Lee Partners, Bain Capital Partners and CCMP Capital also have weighed offers for Wendy's, the No. 3 U.S. hamburger chain, the sources said.

Wendy's, which has a market capitalization of $2.7 billion, could not immediately be reached for comment. Wendy's size could make the deal difficult since leveraged buyouts over $1 billion have had difficulty getting funding in recent weeks.

Karam, Oak Hill, THLee, Bain and CCMP also could not be immediately reached for comment.

"It's unclear how firm Monday's deadline really is. This could go on for a while if prices come in at or just above market value," said one source, who declined to be named.

Shares of Wendy's closed at $31.60, up 33 cents, or 1.1 percent, on the New York Stock Exchange.

The Wall Street Journal reported on Monday that a group that includes former Carl's Jr. and Hardee's Chairman William Foley and buyout firms Ares Management, Oaktree Capital Management and TH Lee decided against submitting a bid by Monday afternoon's deadline.

One sticking point in the auction is that the financing offered by JPMorgan Chase (JPM.N) and Lehman Brothers LEH.N contains several conditions that make it risky and unattractive to potential suitors, sources said.

Both JPMorgan and Lehman Brothers, which are advising Wendy's on the deal, have significant exposure to leveraged loans stuck on their balance sheets, making them unlikely to want to finance much of Wendy's buyout, sources said.

"It's very unattractive to anyone who needs to rely on financing help," said a second source, who declined to be named.

"The offers also have so many exit clauses for the banks that it's risky for Wendy's to accept any offers that rely heavily on funding help," the source said.

In addition, the financing for retail-related buyouts in the last year has often involved the commercial mortgage-backed securities market (CMBS). That market has fallen out of favor along with the subprime mortgage sector, adding further challenges to financing a Wendy's deal, the sources said.

Wendy's put itself on the block in April when credit had been easier to obtain and buyers had more leverage to negotiate favorable borrowing terms.

The credit markets tightened over the summer, and Wendy's slashed its 2007 earnings forecasts. Last month, Wendy's set plans to sales and profits by expanding beverage choices and boosting business during late-night and morning hours.