Heidi’s Agrees to Buyout Offer From Steve’s Ice Cream : Beleaguered Laguna Hills Firm to Be Part of Growing Chain

Steve’s Homemade Ice Cream, a fast-growing New York firm, plans to take its first dip into the yogurt business by acquiring embattled Heidi’s Frogen Yozurt Shoppes of Laguna Hills, the two companies said Tuesday.

Under a preliminary acquisition agreement, Steve’s will buy all of the Heidi’s stock owned by yogurt queen Heidi Miller, the body builder who founded the chain, and associate Brian Pallas. Miller and Pallas own about 86%, or 46 million shares, of Heidi’s stock.

After acquiring the Miller and Pallas shares, Steve’s would purchase the company’s remaining publicly held stock.

Financial terms were not released. But a source close to the negotiations said the transaction would provide Miller and Pallas with 445,000 shares of Steve’s stock valued at about $900,000. Miller also is expected to stay on with Heidi’s, most likely in a public relations role.

Agreement Fell Apart

Richard Smith, chairman and chief executive of Steve’s, declined to discuss the agreement and said the value of the transaction will not be decided until his company has completed its investigation of the firm.

The agreement between Heidi’s and Steve’s comes only 2 months after Heidi’s agreed to be acquired by Johnston Foods, a yogurt manufacturer owned by Button Industries of Los Alamitos. That agreement fell apart several weeks ago, a source said.

The new agreement will add about 100 Heidi’s yogurt shops to Steve’s expanding empire of more than 400 mostly franchised ice cream parlors--including the Swensen’s Ice Cream chain.

The acquisition will introduce Steve’s to the take-out, frozen yogurt industry, which generated about $56 million last year. Sales of the frozen dessert are growing at a rate of 10% to 15% annually, according to TCBY Enterprises, the nation’s leading frozen yogurt seller.

The deal will let Steve’s scoop up an even bigger share of the frozen dessert industry, which totaled $9.3 billion in 1987 sales. Already, the company ranks as the fifth largest ice cream seller in the country, based on information compiled by Restaurant Business, a trade publication.

The sale could also end months of squabbling between Miller and dissatisfied Heidi’s franchisees.

Heidi’s has long been on a downhill slide. For the 9 months ended June 30, the company posted a loss of $619,268. Combined losses of $1.2 million accrued during the 2 previous years.

At the same time, the company has been battling franchisees, several of whom have filed lawsuits claiming that Heidi’s executives mismanaged the chain, did not do enough promotion and misled them about potential store sales. Miller has denied the allegations.

“If Heidi’s hadn’t done this, I wouldn’t have been surprised to see” a bankruptcy filing, said Jeff Kilpatrick, president of Newport Securities in Newport Beach. “This is probably a good solution for Heidi’s financial problems.”

Expanded Recognition

In a prepared statement, Miller said the proposed merger will benefit customers, franchisees and stockholders.

The deal “will expand the recognition of Heidi’s name worldwide . . . and help increase profitability of the franchisees . . . while allowing the franchising network to expand nationwide,” Miller said

Miller, who is Heidi’s president, declined to comment on the terms of the transaction or her future role with the company. She also declined to discuss why the previous deal with Johnston Foods fell through.

Smith said Steve’s “certainly will be calling the shots” after the merger by taking control of Heidi’s financial and internal management. But he added that Miller will remain in an as-yet undetermined role.

For Steve’s, the marriage to Heidi’s seems ideal because the yogurt company does not compete with any of its current products. It also fits a pattern of acquisitions by Smith, 46, who has made a practice of turning around poor performers.

Major Eastern Brand

Smith got his start working for his father’s ice cream company but eventually began his own distributorship. He bought the Dolly Madison trademark when that company was in bankruptcy in 1974 and built it into a major brand in the New York area.

In 1979, he invented Frusen Gladje, a line of premium ice cream that he later sold to Kraft Inc. But he kept its 40 ice cream parlors and the right to franchise Frusen Gladje ice cream shops worldwide.

Steve’s Homemade Ice Cream was started 15 years ago by Steve Herrell, who sold out 4 years later. Smith bought Steve’s from Integrated Resources, an investment firm, about 3 years ago.

Smith owns about 28% of Steve’s stock, which has traded recently for about $2 a share in the over-the-counter market.

In 1987, Steve’s bought the Phoenix-based Swensen’s chain, which had been losing money for years. That deal added 340 Swensen’s ice cream parlors, mostly in the West, to Steve’s 100 shops in the East.

$1.1-Million Net

Swensen’s is known for its premium ice cream with 14% butterfat. Steve’s specializes in a more expensive, super-premium ice cream with even more butterfat.

For the 9 months ended Oct. 1, Steve’s recorded net income of $1.1 million on sales of $14.9 million--contrasted with a $273,000 net loss for the comparable period last year.

About half of its revenue is from franchising and licensing, with the rest from Steve’s wholesale sales.

Of Steve’s operations, only four Swensen’s stores are company owned, and the acquisition of Heidi’s will give it a third type of franchise and product.

Steve’s can become a full-service seller of frozen products--with Steve’s selling upscale, premium ice cream, Swensen’s as a family restaurant that sells premium ice cream at a lower price and Heidi’s selling frozen yogurt to the health-conscious.

The company “will be able to offer franchises in the super-premium category, the premium restaurant category and now yogurt shops,” said Howard Englander, a Steve’s spokesman.