Winchell's Donut Houses, the nation's second-biggest chain of doughnut shops, on Thursday tentatively agreed to be acquired for $40 million in cash by Shato Holdings Ltd., a Vancouver firm with restaurant and real estate interests.
La Mirada-based Winchell's had been looking for a buyer since June 8, when the company announced it would consider offers. Winchell's was put up for sale just one day after TW Services, which owns 42% of Winchell's, agreed to be acquired by a New York investment firm, Coniston Partners, in a deal valued at $1.65 billion.
For Coniston, Winchell's was an unattractive part of the TW Services package. TW Services also owns Denny's coffee shops and El Pollo Loco restaurants, both of which Coniston has said it intends to keep.
Winchell's has been beset with financial and legal problems since it was spun off from Denny's in 1987 and 58% of the doughnut chain's stock was sold to the public for about $90 million.
Second only to Dunkin Donuts among the nation's doughnut chains, Winchell's lost $12.8 million in 1988 and posted a deficit of $3.4 million on revenues of $36.3 million during the first quarter of 1989.
"The performance has been embarrassing to everyone," said Ward Lendenmayer, an analyst at Sutro & Co. "Selling has been a possibility for the past two years."
Lendenmayer said poor management, growing competition from bakeries at grocery store chains and small growth in demand for doughnuts were among the factors in the decline of the once-profitable chain. Winchell's, which now has 657 stores in 14 Western states, had nearly 1,000 stores in the late 1970s.
Winchell's took a fateful step under Denny's management in 1971 by buying out its franchisees and coverted all outlets to company-owned stores.
"That was a big mistake," Lendenmayer said. "There isn't enough (sales) volume to pay employees very much. People tend to work harder when they have a stake as a franchisee."
Lendenmayer also said the company faltered by not diversifying into product areas such as croissants and muffins.
The prospective new owner of Winchell's--Shato Holdings--would not disclose how it would manage the chain. Shato owns more than 100 restaurants and catering outlets in British Columbia, including White Spot restaurants and Kentucky Fried Chicken outlets. The private company, headed by Peter Toigo, also owns a land development company.
"We'll have more to say when the deal is completed," said Gail Prichard, an assistant to Toigo.
Used Car Salesman
The chain was founded in 1948 by Verne H. Winchell, who opened the first shop in Temple City after trying his hand at selling used cars and jukeboxes.
After a rocky start, the chain blossomed. In 1968, Denny's purchased the then 200-store operation in return for stock, and Winchell became chairman of the operation until 1980. Winchell's biggest presence remains in California, where it maintains 447 stores.
The deal hinges on the approval of a majority of Winchell's shareholders. Shato has agreed to pay $3.80 for each of the 6.88 million units, a type of security, in the company. In addition, Shato will provide about $14 million to cover transaction costs, debt and other Winchell obligations.
Winchell units closed at $3.375 Thursday, down $1, in trading on the New York Stock Exchange.