Small caps last week: Battle for Wendy’s, Brazil selloff, Innodata layoffs

Last week, burger chain Wendy’s received a $1.4 billion buyout offer from a group of investors led by billionaire Nelson Peltz’s fund. Shares of Brazilian fintech PagSeguro Digital lost a quarter of their value after the second-round of the country's presidential election. Meanwhile, Innodata stock plunged following reports of layoffs and reduced work on a project. These stories headline our recap of news in the small-cap space for the week of October 26-30.

A group of investors led by billionaire Nelson Peltz’s Trian Fund Management have offered to acquire burger chain Wendy’s, valuing its equity at around $1.4 billion. The offer of $7.35 per share in cash represents around a 20% premium to Tuesday’s closing price. The following day, Wendy’s shares surged 15.2% to $7.07 apiece.

Alongside Trian, the consortium includes Flynn Group, BlueFive Capital, and Sixth Street Partners. The proposal is nonbinding and will be evaluated by a committee of independent Wendy’s directors.

Wendy’s shareholder Blackwells Capital has already opposed the acquisition on the proposed terms. It considers the price too low and accuses Peltz, who chaired Wendy’s board for 17 years, of trying to capitalize on the consequences of his own failed stewardship. Trian had already backed away from buyout plans in August over concerns about the company’s performance and stock valuation.

The offer comes amid a downturn: Wendy’s U.S. same-store sales have declined for six consecutive quarters, Blackwells notes. They fell 7% in the second quarter. The management withdrew its full-year guidance and cut the dividend to free up funds for a turnaround.

According to MarketWatch data, 18 of the 25 analysts covering Wendy’s have “hold” ratings on the stock. Three others recommend buying, and five selling. The average target price of $7.30 per share implies around 1.2% upside from Friday’s close.

Shares of PagSeguro Digital fell 25.2% on the New York Stock Exchange on Monday to $8.56 apiece. The selloff followed incumbent President Luiz Inácio Lula da Silva’s victory in the presidential runoff the day before.

Markets had expected a victory for hard-right candidate Flávio Bolsonaro, who led in the first round, and hoped a change in president would bring spending cuts and deregulation. After the second-round result was announced, investors dumped Brazil's currency, stocks, and bonds.

The election result alone, however, is no reason to sell PagSeguro, Motley Fool contributor Rich Smith argues. In his Monday post, he pointed out that the stock traded at a price/earnings ratio of 7.7, while analysts forecast annual earnings growth of more than 10% over the next five years. Together, those factors make the stock attractive regardless of who is president in Brasilia, Smith believes.

Most analysts whose ratings are compiled by MarketWatch recommend "hold." Still, the average target price of $10.67 per share implies around 34% upside from Friday’s close.

Innodata, which prepares data and helps clients train AI models, saw its shares fall 25.3% on the Nasdaq on Tuesday to $44.74 apiece. The selloff followed media reports of layoffs in India and the Philippines, affecting around 550 employees in India and an undisclosed number in the Philippines.

The layoffs affected more than 5% of Innodata’s workforce, according to Motley Fool. Termination notices cited a reduction in work on a project. Innodata did not comment on the reports.

For investors, the main risk is Innodata’s dependence on large customers. Its two largest customers accounted for 71% of second-quarter revenue, contributing 37% and 34%, respectively. A reduction in work on a major project could therefore hurt its growth prospects, TIKR notes.