Del Taco/Naugles Inc. Acquired in Buyout


Del Taco/Naugles Inc., the nation's second-largest Mexican-style fast food chain, was acquired Thursday in a management buyout that threatens to resuscitate the taco war with rival Taco Bell.

A four-member management group, headed by company President Wayne W. Armstrong, acquired the privately held chain from Newport Beach restaurateur Anwar Soliman for an undisclosed price. Industry analysts estimated the deal's value at $100 million to $150 million.

In announcing the transaction, Armstrong also said Del Taco/Naugles would return "to its traditional fast-food roots" by lowering prices and serving smaller portions. The company also plans to return to 24-hour service in many of its 350 outlets.

The acquisition comes less than two years after Soliman bought Del Taco and Naugles and upgraded their menus with more expensive and elaborate offerings.

The deal also coincides with efforts by Soliman to raise $100 million through the issuance of junk bonds to increase his stake in American Restaurant Group, which owns 360 restaurants including the Stuart Anderson's Black Angus chain.

Soliman wants to buy out a large stake that GE Credit Corp. holds in ARG, industry sources said. He has been unable to raise the money because of the slump in the junk bond market. Those sources said the sale of Del Taco/Naugles is likely designed to help buy out GE.

Soliman could not be reached for comment.

Ironically, GE Credit financed the buyout by Del Taco management: Armstrong, who is also chief executive officer, and three corporate vice presidents--John Crofton, Harold Fox and Paul W. Hitzelberger. The four are equal partners in the acquisition.

How much cash Soliman raised is unclear--the deal was structured so that Armstrong and his partners paid only part of the price in cash. Soliman also received notes, unspecified "other interests" and the right to develop and operate Del Taco and Naugles restaurants in Hong Kong, Thailand, Indonesia, Taiwan, Japan and the Republic of Korea.

Armstrong, who was president of Del Taco when Soliman bought the operation in March, 1988, and combined it with the smaller Naugles chain, said the new owners plan to make some quick changes in operations.

That could mean a resumption of the so-called taco war launched in 1988 when Soliman combined the two smaller chains and tried to challenge Taco Bell's supremacy. But in rekindling the competition, Armstrong and his team are repudiating Soliman's vision of an upscale fast food chain.

The company's return to its roots was launched over the weekend as new items--most of them downsized versions of the larger and higher-priced items that have been on the menu for the past two years--were added to the menu boards of the 290 Del Tacos and 25 Naugles in California, the 34 Naugles in Utah, Nevada, Missouri and Arizona and the single Del Taco in Arizona.

Under Soliman, the Del Taco and Naugles menus--and prices--had been raised and, Armstrong acknowledged Thursday, the chain had begun losing customers to rival Taco Bell, which at the same time lowered prices.

Armstrong said that the new owners plan to have most of the chain's restaurants open 24 hours a day by the end of March. Most of the stores now close at midnight.

Del Taco/Naugles has 350 restaurants and estimated gross annual sales of $250 million. It has about an 11% share of the national market for Mexican fast-food restaurants.

Taco Bell, the Irvine-based unit of Pepsico, is the largest Mexican-style fast food chain in the country with more than 3,000 restaurants nationally and about 70% of the market.

On Thursday, the company repeated its long-held position that Del Taco/Naugles is not and has never been considered a competitor.

"Taco Bell is No. 8 on the (Restaurant Hospitality magazine) list of fast feeders," said company spokesman Elliot Bloom. "Del Taco is somewhere in the 80s. . . . We consider McDonald's our competition, not Del Taco."

But Del Taco/Naugles certainly considers Taco Bell--with 620 restaurants in California--to be major competition.

"We went too far" in the taco war in 1988, Armstrong said. When Del Taco/Naugles began advertising itself as an alternative to Taco Bell, the bigger chain's products "were a little smaller and a little cheaper than ours," he said. "And then we went upscale at same time they went downscale" and introduced a line of 59-cent items.

"They zigged when we zagged, and the difference in price became so great that the really price-sensitive customer went to Taco Bell," Armstrong said. "We had moved too far upscale, almost to the sit-down restaurant stage.

"We are now saying that we really are a quick-service restaurant and are going to provide prices comparable to Taco Bell's pricing as well as items for those who want bigger items at a higher price," he said.

Part of that quick-service philosophy is represented in the return to 24-hour operation, which makes Del Taco/Naugles the only major fast food chain in Southern California to be open around the clock.

Before 1988, Naugles had operated on a 24-hour basis for years, "and Del Taco was getting into it in a big way," Armstrong said.

Soliman quashed that.

"But we are a mass merchandiser," Armstrong said. "And we think there is a market for us between midnight and 8 a.m. It is like what the supermarkets did a few years back. People can think of us as a restaurant they can go to at any time of the day."

Operating 24 hours daily can be a risky business because the market for post-midnight fast foods is a limited one at best, said Michael G. Mueller, an industry analyst with Montgomery Securities in San Francisco.

"But if you are going to do it, Southern California is the best place to try," he said.

DEL TACO/NAUGLES INC. Armstrong PARENT COMPANY: AWR II BUSINESS: Operates Mexican-style fast-food restaurants. LOCATION: 345 E. Baker St., Costa Mesa KEY EXECUTIVES: Wayne W. Armstrong, president and CEO and vice presidents John Crofton, Paul W. Hitzelberger and Harold Fox. EMPLOYEES: 700 full time and 7,300 part time. OPERATING UNITS: 350, including 291 Del Tacos and 59 Naugles in California, Arizona, Utah, Nevada and Missouri. MARKET SHARE: 11% ESTIMATED SALES: $250 million annually RECENT DEVELOPMENTS: The company was acquired by the management team from Newport Beach restaurateur Anwar Soliman for an undisclosed price. Analysts estimate the transaction at $100 million to $150 million. Sources: The company and industry analysts.

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