Thread by @SteadyCompound

Bill Ackman has a great track record of investing in restaurant businesses.

Many know his successful investments in Chipotle and Starbucks.

But, FEW know about his early success with Wendy's and McDonald's.

A breakdown of @BillAckman thesis on $WEN and $MCD:

@BillAckman Wendy's Thesis

Ackman took a ~10% stake in Wendy's in 2005.

The company had a $5B market cap.

And it OWNED 100% of Tim Horton's, a Canadian coffee and donut chain.

@BillAckman Tim Horton's was generating $400M in operating income.

And Ackman valued the company at over $5B (a 12.5x EBIT multiple).

Wendy's estimated worth was a few billion dollars as well.

Meanwhile, you could buy ALL of Wendy's (with Horton inside) for under $5B 🤯

@BillAckman The game plan:

Buy Wendy's, spin off Tim Horton's...

And get Wendy's for free!

By buying Wendy's at $38 per share, spinning off Tim Horton's, the share would double to $76 per share.

@BillAckman However, it wasn't without problems.

Ackman proposed to the management:

1️⃣spin-off of Horton,
2️⃣sale of a large portion of the company's restaurants to franchisees, &
3️⃣share repurchase program.

Initially, the management refused to consider Ackman's proposal.

@BillAckman Eventually, Wendy's did spin-off Horton and took measures to improve margins.

Ackman sold Wendy's about 1.5 years later in Nov 2006.

The stock had appreciated from $38 to $71.

A handsome return of 87% in less than two years!

And this sets them up for McDonald's.

@BillAckman McDonald's Thesis

Ackman viewed $MCD as 3 separate entities:

1️⃣ a franchising operation (75% of its restaurants are franchised)
2️⃣ a restaurant operation (the remaining 25%)
3️⃣ a real estate business

It had land ownership of 37% of all restaurants and 59% of all buildings!

@BillAckman Ackman took a position in $MCD in late 2005.

His goal was to convince management to sell or spin off its company-operated stores to its top franchisees.

Its franchisees were better at running the stores and would improve the operating performance of the restaurants.

@BillAckman "$MCD is what we call a brand royalty company..." — Ackman

They collect 4% of franchisees gross revenue and charge about 9% to 10% in rent.

This means that the company takes about 13-14% off its franchisees' sales.

This is one of the greatest annuity streams of all time!

@BillAckman But $MCD was doing the exact opposite.

They were buying out their franchisees and turning them into company operated stores.

Even when the economics of running a restaurant is not nearly as attractive as the business of collecting a royalty in exchange for a brand.

@BillAckman $MCD felt that their restaurant business was profitable.

Because they were making high- to mid-teens margins.

This would indeed be considered profitable for a restaurant...

Except they were mistaken!

They weren't charging themselves rent or a franchise fee.

@BillAckman In business, it's all about opportunity costs.

If they deducted 4% in franchise fees and 8-9% in rent, along with corporate overhead and capital expenditures, they would not be making much money operating restaurants themselves.

It was far better to let franchisees do it.

@BillAckman $MCD publicly rejected Ackman's proposal.

But quietly caved in by beginning a process of selling its restaurants to franchisees.

The stock eventually doubled over two years, a big move for a large cap!

@BillAckman That's a wrap!

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