Shareholders Must Approve; Some Think $9 Bid Too Low : Rusty Pelican OKs VSR Buyout Offer

Rusty Pelican Restaurants Inc. unanimously approved a $25.4-million cash buyout offer Wednesday from San Diego-based Vicorp Specialty Restaurants Inc., a privately held operator of 83 dinner houses.

If Rusty Pelican shareholders approve the deal, VSR will pay $9 per share for 2.8 million shares of outstanding common stock. VSR would also assume $18.7 million in long-term debt and capitalized leases of the Irvine-based chain.

VSR operates specialty dinner houses in 11 states under the chain names of Hungry Hunter, Mountain Jacks, Boathouse, Monterey Whaling Co., the Dock and Carlos Murphy’s.

Rusty Pelican operates 21 restaurants in seven states, including 12 in California. The restaurants operate under the names Rusty Pelican, Ancient Mariner and Rusty Duck.

The restaurant chain that is now VSR began in 1967 as San Diego Restaurant Operations. That company eventually was acquired by Ralston Purina. In 1984, it was sold again, to Denver-based Vicorp Restaurants, and was renamed Vicorp Specialty Restaurants.

Denver-based Vicorp sold its dinner-house restaurants as part of a capital-raising effort in a leveraged buyout that was put together last November. A group of management-led investors bought the subsidiary in a deal valued at about $112.5 million.

Wall Street reacted enthusiastically Wednesday to the news that Rusty Pelican’s board had approved the proposed acquisition. Rusty Pelican closed up $1.50 at $8.50 on the over-the-counter exchange.

But several large, individual investors were far less pleased and viewed the offer as an attempt by VSR to steal away the company at a bargain-basement price.

Said Edward P. Grace III of East Providence, R.I., Rusty Pelican’s second largest shareholder with 7.2% of the company’s shares: “I would be much happier if (the offer) were over $10 (per share). I’ve always felt it would go for over $12.” Grace had threatened his own takeover attempt late last year.

Another investor, who asked not to be named, suggested that the low offer would spur higher-priced bids. “Shareholders possibly will accept (Vicorp’s) offer if a higher bid doesn’t emerge, but it won’t be with a smile on their faces,” the investor said.

However, industry analysts suggested that the two companies would be stronger after the proposed acquisition, largely because of VSR’s strong management team.

VSR Chairman Gordon Miles is “a really smart operator,” said Philip Orlando, a research analyst in New York with DLJ Securities. “I wouldn’t bet against him.”

Michael G. Mueller, an industry analyst with Montgomery Securities in San Francisco, suggested that VSR’s experienced management team will continue to be successful in the competitive dinner-house business, where margins are tight and expansion through new locations has been limited.

“This isn’t the easiest business to run, and it takes a certain kind of company to succeed,” said Mueller, who added that he is “impressed” with Miles and VSR’s president, Thomas Doan.

Mueller noted that VSR has “a heavy debt load but they also have a solid cash flow and a very strong management team.” He described the proposed merger as “opportunistic because it sounds like they bought it for an attractive price.”

Rusty Pelican officers defended the $9-per-share price, noting that shareholders would get a 28% premium over Tuesday’s closing price. “If somebody thinks it should go for $10, either he knows something we don’t or he should come forward to pay $10 per share,” said Rusty Pelican Finance Officer Greg Dollarhyde.

Selling the company “is the best way to maximize shareholder value at this time,” said Dollarhyde, who cited a tough competitive environment for dinner-house restaurants.

Rusty Pelican’s performance over the last several years has ranged from lackluster to abysmal.

Since its founding 23 years ago by Chairman Louis (Pete) Siracusa, a former Newport Beach lifeguard, the seafood chain has gone from posting the highest average annual sales per unit of any chain restaurant in the United States--$3.68 million in 1985--to near-disastrous results last year.

The company traded for as much as $15.375 per share in 1986 but by year’s end had been weakened by competition in the restaurant industry and slowed alcohol sales, leading to poor results at some units.

Rusty Pelican closed its 1986 fiscal year, ended Aug. 3, with a $256,000 loss, despite record sales for the year of $59.8 million.

Third-Quarter Results

By May, however, the chain seemed to be turning around when it reported net earnings of $261,000 for the third quarter of its fiscal 1987, contrasted with a loss of $512,000 posted a year earlier. The results marked the company’s first positive earnings comparison since July, 1985.

On Wednesday, Dollarhyde--as well as the investors who criticized the VSR offer--said the Rusty Pelican chain should continue operating in the black and performing reasonably well. But Dollarhyde noted that analysts estimate earnings this year of only 25 cents per share. “We expect to be profitable, but we’re still not where we want to be,” he said.

In November, Alex Brown & Co., an investment banker, was hired to help Rusty Pelican “review (its) options.” The VSR merger proposal subsequently appeared, Dollarhyde said.

VSR, a privately held company, declined Wednesday to provide financial details.

In the last year for which data is available, VSR’s fiscal 1986, the company reported sales of $167.9 million, up 12% from the preceding year. Operating profits of about $16.18 million were down about 10% from $18.1 million reported a year earlier.

VSR anticipates changing its name within the next two years to avoid confusion with Denver-based Vicorp.