Dive Brief:
- Meritage Hospitality Group plans to sell 42 Wendy’s restaurants in Tennessee, Arkansas, Mississippi and Missouri to Divine Infinity Operations for $18.6 million, according to a Wednesday court filing.
- The bankrupt Wendy’s franchisee also asked the court to reject leases for 13 units last week and could close up to 60 stores, according to Nation’s Restaurant News.
- The sale and potential closures could leave Meritage, which operated 314 restaurants at the time of its initial September bankruptcy filing, with about 200 Wendy’s units.
Dive Insight:
The sale could smooth tension between Meritage and Wendy’s, as the funding from the sale could help pay down past due royalties or other debt, per the court documents.
Meritage began seeking a buyer for these locations last November and identified experienced multi-unit operators with strong infrastructure, brand familiarity and “franchisor relationships necessary to obtain franchisor approval and to finance and close a transaction of this size,” Chirstopher Kelleher, managing director of Auspex Capital, which marketed the sale, said in a court filing.
“A prompt sale to the Buyer will preserve the going-concern value of the Restaurants, preserve hundreds of jobs and the Restaurants’ franchise relationship, and provide liquidity for the Debtors’ estates,” Kelleher wrote.
Meritage originally declared bankruptcy on Sept. 17, a day after Wendy’s terminated its franchise agreements due to non-payment of over $27 million in royalty obligations.
Meritage, once one of Wendy’s top franchisees, struggled for several quarters with declining sales. It also endured lower customer frequency resulting from an ineffective brand marketing strategy set under Wendy’s prior management. Deep discounting and national promotions compressed margins further.
Wendy’s originally claimed the operator didn’t have a right to ask for support to operate its restaurants after Wendy’s terminated Meritage’s franchise agreements.
Meritage objected to those claims on Oct. 1 and asked the court for injunctive relief. Meritage claimed that Wendy’s termination notice includes a short-term license agreement to allow the operator to continue operations using Wendy’s brand and intellectual property.
The franchisee also claimed that Wendy’s never sent a physical copy of a termination notice to Meritage’s offices. Meritage claims that Wendy’s never intended to have “the lights to go out” and that it wanted Meritage to continue to operate to allow for an “orderly transition,” and that the emailed notification regarding termination was meant to “gain leverage in ongoing negotiations.”
Bankruptcy proceedings have since continued with Meritage filing at least four omnibus motions asking the court to reject various unexpired leases.
While Meritage is the biggest example of a franchisee in distress in recent months, several other franchisees, including operators of Carl’s Jr., Hardee’s, Popeyes and Moe’s, declared bankruptcy this year. Franchisees are facing tight margins, rising food and labor costs and declines in sales and traffic as consumer spending has dropped in response to inflation.
