Pepsi Offers to Buy Biggest Taco Bell Franchisee
Displeased with the performance of its largest franchise operator of Taco Bell restaurants, Pepsico Inc. on Monday made an unsolicited offer to acquire franchisee Calny Inc. of San Mateo, Calif., in a transaction valued at about $54 million.
Pepsico said it made the offer to pay $11.50 a share for Calny’s 4.7 million outstanding shares through its Taco Bell unit in Irvine after becoming concerned about falling profits at Calny, which operates 143 Taco Bell restaurants in California, Oregon, Texas and Washington as well as 15 La Petite Boulangerie bakeries in the Seattle area.
About 2,500 Taco Bell restaurants operate nationwide, of which about 50% are owned by Pepsico.
“The reason for our acquisition of Calny is due to a continuing deterioration of their financial performance,” said Keith Anderson, a spokesman at Pepsico’s headquarters in Purchase, N.Y.
Anderson said Pepsico was especially concerned about “the operational quality and service” at Taco Bell and La Petite Boulangerie outlets operated by Calny as well as with Calny’s “poor earnings.”
Officials of Calny, whose net income fell to $2.7 million in fiscal 1986 on revenue of $67.8 million from $3.1 million on revenue of $54.3 million in the year ended Feb. 28, 1985, declined to comment on Pepsi’s statements.
However, Calny’s board recently rejected two unsolicited offers to purchase the company for $11.50 to $12.50 per share.
Several financial analysts, who asked not to be identified, noted that Pepsico’s offer comes two weeks after Calny filed a lawsuit against Pepsico and its La Petite Boulangerie bakery subsidiary seeking $5 million in compensatory damages for breach of contract.
The lawsuit, filed in San Mateo Superior Court, alleges that Pepsico failed to support the La Petite Boulangerie franchise and that Pepsi “repeatedly delivered (dough and other) products that were unmarketable and in many instances was contaminated.”
The suit also accused Pepsico of misrepresenting the readiness of the bakery chain to be expanded outside the San Francisco area and misrepresenting the cost associated with operating the restaurants.
The suit claimed, for instance, that Pepsi officials told Calny executives that they “could expect gross annual sales of $375,000 or better” per store and “profits exceeding 20% of sales.”
Instead, analysts say, the bakeries never proved profitable. Although Calny officials declined to release specific figures on their La Petite Boulangerie operations, analysts have forecast that overall earnings of Calny will fall 15% to 20% due to lower-than-expected sales and high costs associated with opening the new bakeries.
“Calny is . . . in good growth markets such as California, and it hasn’t had good results,” noted Martin Romm, an industry analyst with First Boston in New York. “If you look at the way Pepsi operates, it is not unusual for them to step in and attempt to gain control. This is a way to impose discipline” over franchisee owners, he said.
