Not-So-Sweet Scoop : Analysts Speculate Parent Firm’s Woes May Force Sale of Baskin-Robbins

Are the 31 Flavors in danger of being eighty-sixed?

Takeover speculation is again swirling around Allied-Lyons PLC, the British drinks group that also owns Baskin-Robbins Inc. in Glendale, the nation’s biggest ice cream chain renowned for its 31 Flavors. The latest speculation stems from Allied-Lyons’ recently slumping earnings, which were hurt this spring by the company’s trading of foreign currencies.

The currency problems not only hurt Allied-Lyons’ profit, but they also pushed the London-based company’s stock price down to about half of Allied-Lyons’ breakup value, analysts said. The setbacks also prompted three of Allied-Lyons’ top executives to resign, leaving the company with new management that’s more vulnerable to a takeover, they added.

“It’s reasonable to believe that the hand on the tiller is not a particularly strong one at this point,” said Steven Dixon, who follows the company for the investment firm Arnhold & S. Bleichroeder in New York.

Although a specific takeover threat has not materialized, the rumors raise the question: Might Allied-Lyons sell the chain to bolster its financial results and quash the threat, or if Allied-Lyons were acquired would the new owner jettison Baskin-Robbins either to enhance its return on investment or to pay off any debt it might need to swing the deal?

Baskin-Robbins isn’t providing answers. Chairman William I. Savel and other executives declined any comment. In London, Allied-Lyons spokesman Charlotte Sillars said the company has no plans to sell Baskin-Robbins and is pleased with the chain’s performance.

Some analysts also discount the theory that Allied-Lyons would consider selling the chain as a takeover defense. “They consider that a core part of their food business,” Dixon said. “It’s not something they would do as part of their strategy or in response to a takeover threat.”

But analysts are less sure Baskin-Robbins would survive a new owner at Allied-Lyons. “If somebody did buy Allied-Lyons with a view toward breaking the company up, obviously Baskin-Robbins would be for sale,” said Christopher Wickham, an analyst with Lehman Bros. in London.

“You could break the company up more easily than a Hollywood marriage,” Wickham said. Part of what makes Allied-Lyons an attractive target is that each of its three divisions--distilled spirits, beer and food--are clearly defined and could be neatly sliced apart and sold by a new owner, he said.

But there are reasons to believe that Allied-Lyons, and Baskin-Robbins for that matter, won’t be changing hands any time soon. Takeover talk has surrounded Allied-Lyons before, but it’s not as easy for suitors to mount a takeover as it was in the 1980s, largely because lenders are more cautious about financing buyouts. “There is a shortage of resources,” said Wickham.

Allied-Lyons is one of the world’s largest spirits companies, with such brands as Ballantine and Canadian Club whiskeys, Courvoisier brandy and Beefeater gin. The company also is a major beer retailer in Britain, and its food group also includes Dunkin’ Donuts Inc.--which it bought in 1989--and Tetley Inc., a coffee and tea marketer.

In its fiscal year ended March 31, Allied-Lyons’ sales rose 9%, to about $8.3 billion based on current foreign-exchange rates. But its pretax profit (British companies generally report their earnings before taxes) dropped 15%, to $771 million, because of $237 million in currency trading losses.

The lower profit--coming at a time when Allied-Lyons’ rivals, such as Guinness PLC, were showing double-digit earnings gains--renewed takeover speculation about Allied-Lyons that has periodically surfaced over the past several years. The poor results and the embarrassing currency fiasco also spurred the resignations of Allied-Lyons’ chairman, Sir Derrick Holden-Brown, and its chief executive, Richard Martin.

As for Baskin-Robbins, the ice cream chain wasn’t responsible for Allied-Lyons’ recent problems, but its financial performance elicits mixed signals.

As of Dec. 31, Baskin-Robbins had 2,278 stores in the United States--most of them operated by franchisees--and another 1,040 outlets in 44 foreign countries, for a total of 3,318 stores. International Dairy Queen Inc., based in Minneapolis, has about 5,200 stores around the world--including 4,600 in the United States--but most of those also serve fast food.

As a unit of a foreign company, Baskin-Robbins does not publicly break out its financial results. But Technomic Inc., a food industry consulting firm in Chicago, estimates Baskin-Robbins’ U.S. systemwide sales last year at $490 million.

That’s up only 7% since 1987 (although the chain has 9% fewer U.S. outlets) and it reflects no improvement from Baskin-Robbins’ American sales in 1985. The culprits have been, among other things, growing competition from such “premium” ice cream brands as Haagen-Dazs and marketers of frozen yogurt and, in the past year, the economic recession. Supermarkets’ expansion of their ice cream offerings also has hurt.

“In all of the fast-food elements, the supermarkets are coming on like gangbusters,” said Barbara Dawson, West Coast editor of Restaurants & Institutions magazine.

Nonetheless, Baskin-Robbins’ “same-store” U.S. sales in 1990--excluding sales from newly opened stores--climbed 12% from the previous year, said Nancy Kruse, an analyst with Technomic. By comparison, International Dairy Queen’s same-store sales slipped 1.6%, she said.

Baskin-Robbins has responded to the growing competition in recent years by introducing its own frozen yogurt, “premium” ice cream, and low-fat, low-cholesterol desserts for the weight conscious. It has also revamped many of its stores and boosted its advertising effort.

“One of the things Baskin-Robbins did was recognize that they had to serve the whole family with a complete line of products,” said Howard Waxman, editor of Ice Cream Reporter, an industry newsletter in New York. “Now, everybody can walk out eating something.”

As a result, Baskin-Robbins’ menu is far more complex than in 1945, when the company was started by Irv Robbins. He soon teamed up with his brother-in-law, Burton Baskin, to open what was then unique: stores that sold ice cream only. They introduced the “31 Flavors,” for each day of the month, in 1953, but over the years the company actually has concocted some 600 flavors. Baskin-Robbins was bought in 1973 by J. Lyons & Co. of Britain, which later merged with Allied Brewery to form Allied-Lyons.

Although the recent arrival of frozen-yogurt and premium-ice-cream competitors has made Baskin-Robbins’ life more difficult, some of those rivals are now having their own problems. Consider TCBY Enterprises Inc., which has 1,850 frozen-yogurt stores. Despite its fast start in the mid-1980s, TCBY’s sales growth slowed last year, and its stock price melted as a result.

In this competitive market, Baskin-Robbins still has “their reputation and name going for them,” said Restaurants & Institutions’ Dawson. “31 Flavors still has the ring to it.”

Regardless, Allied-Lyons’ stock currently trades in London for the equivalent of about $8.90 a share, but analysts estimate that the market value of the company’s various divisions totals about $16.10 a share. As long as that gap remains, they say, so does the takeover threat and therefore the questions surrounding Baskin-Robbins’ future.

The Growth at Baskin-Robbins

Baskin-Robbins’ U.S. sales have increased a modest 7% since 1987 even though the Glendale-based ice cream chain has 9% fewer stores. The figures below are the combined results of U.S. stores owned both by Baskin-Robbins and its franchisees, which account for most of the chain’s outlets. Baskin-Robbins has 1,040 additional stores in 44 foreign countries.

U.S. systemwide sales U.S. Year (in millions) stores 1985 $490 2,502 1986 $439 2,542 1987 $460 2,511 1988 $475 2,449 1989 $477 2,324 1990 $490 2,278

Source: Technomic Inc.