Collins Foods to Sell Unit in Bid to Retire Some Debt

Collins Foods International Inc. has pulled out of the distribution business and moved to pay off some of its debt with the sale of its Collins Foodservice Inc. subsidiary for up to $40 million.

The subsidiary, headquartered in Orange, was purchased by Bunzl Distribution USA Inc., the St. Louis-based subsidiary of Bunzl PLC, a publicly held British company with interests in paper products, Collins officials said Monday.

The price includes an immediate payment of $34 million in cash and up to $6 million more over the next three years, according to Robert G. McGough, vice president of finance for Bunzl Corp. and Bunzl USA, based in Florham Park, N.J.

The additional $6 million is contingent on the level of purchasing by Collins Foods, which has accounted for about 40% of the subsidiary’s food service business, industry analysts said. The Los Angeles-based restaurant company owns or licenses 992 restaurants in the United States and abroad, including 548 Sizzlers, 176 Naugles outlets and 253 Kentucky Fried Chicken operations.

Collins Foodservice has about 500 employees in six distribution centers in three states. Its primary distribution facility is in the City of Industry, with fewer than 25 employees located at the Orange headquarters.

Collins Foodservice Inc. will retain its name and become a separate operating subsidiary of Bunzl USA, McGough said. No management changes or layoffs are planned although “our expectation is that it will expand” probably within a year, he added.

The acquisition is the 32nd in the United States since 1981 by Bunzl USA, which reported sales last year of more than $800 million.

For Collins, the sale signals a return to focusing exclusively on the restaurant business--a move that sparked enthusiasm Monday on Wall Street.

When news of the sale was announced, Collins Foods shot up 75 cents a share to close at $22.875 on the New York Stock exchange.

“It’s a very big positive. . . . They’re eliminating a low margin, sluggish business which operates in a very competitive environment,” said Adam S. Levy, a research analyst in New York with Donaldson, Lufkin & Jenrette.

Collins had been aggressively seeking a buyer since last fall for Collins Foodservice, which distributes paper goods and produce to restaurant chains in 10 Western states.

The subsidiary’s fiscal 1987 sales were about $182.1 million. But operating profits for the fiscal year ended April 30 were $6.2 million, down 19% from $7.4 million the prior year.

James C. Collins, Collins Foods’ chairman, said the sale continues his company’s strategy “to concentrate, expand and grow in the retail side of the food-service industry.”

Proceeds from the sale will be used to pay down Collins’ $164.2 million in long-term debt, according to Christopher Thomas, chief financial officer. Thomas said any proceeds not used for debt reduction will “be invested in ongoing operations.”

Industry analysts said Monday that the sale could also go a long way toward boosting Collins’ stock on Wall Street.

“They’ll be able to make their returns more comparable to other restaurants,” said Barry M. Ziegler, an analyst with Tucker Anthony & Co. in New York. Levy said he believes that Collins stock has been undervalued. “I imagine people will start looking at Collins,” said Levy, who predicted the stock will jump to about $32 over the next six to 12 months.