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Wendy's Divests Seattle Units

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As a part of its brand revitalization initiative, The Wendy’s Co. (WEN) recently divested 24 company-operated restaurants together with two future locations in the Seattle market to Cedar Enterprises, Inc. The financial terms of the deal were not disclosed.

Wendy’s shares a longstanding relationship with Ohio-based Cedar Enterprise, its third largest franchisee operating 170 restaurants across five U.S. states, with 47 units in Washington.

Cedar Enterprise has been active in Washington for more than 15 years and has adequate local market knowledge. This makes it an ideal candidate for franchising the Seattle market in Washington.

As per the National Restaurant Association, the restaurant industry in Washington contributes considerably to the state’s revenues. According to the research organization, Washington’s restaurants are expected to record $10.9 billion in sales in 2013.

The latest deal is aimed at optimizing the company’s restaurant portfolio. Wendy’s seeks to franchise about 425 company-operated restaurants in 13 U.S. markets.  The entire process is expected to end by the second quarter of 2014. Operators who have a proven track record and conform to the company’s reimaging program are being chosen for this conversion. The company continues to divest units, mainly in the West, with qualified buyers expressing interest.

Franchising has got a boost of late, given the benefits of this business model amid an anemic economy. We believe franchising a large chunk of the system will provide another opportunity for margin expansion. Also, the company’s efforts to reduce its capital requirements will ensure steady free cash flow generation.

Many operators in the restaurant sector including Burger King Worldwide (BKW), McDonald’s Inc. (MCD) and Yum! Brands Inc. (YUM) have franchise-centric business models.

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