New Plans on the Menu for 2 Firms : Restaurants: Foodmaker, owner of Jack in the Box, plans a $200-million share offering. Chart House buys rights to open Islands restaurants.
Restaurant industry profit margins are being hurt by the economic slowdown, but two locally-based chains believe that the time is right for fairly dramatic moves.
Debt-heavy Foodmaker Corp., which owns the Jack in the Box and Chi-Chi’s restaurant chains, plans to go public again with a $200-million offering. San Diego-based Foodmaker first went public in 1987, but the company went private again in 1988 after a management-led leveraged buyout.
Solana Beach-based Chart House, which operates 94 restaurants in 22 states, recently purchased rights to develop and operate at least 50 Islands restaurants in San Diego, Arizona, Florida and Hawaii. Costa Mesa-based Islands restaurants, which serve gourmet hamburgers, now operates nine restaurants in Los Angeles and Orange counties.
Although the restaurant market’s profit margins have been eroding as consumers cut back on discretionary spending, the moves by Foodmaker and Chart House make economic sense, according to restaurant industry analysts.
During the past year, a handful of “high-quality, high-return companies” have completed public offerings, said Michael G. Mueller, a San Francisco-based industry analyst with Montgomery Securities. Also, “some reverse LBOs (along the lines of Foodmaker’s planned offering) have done well in this market,” Mueller said.
Foodmaker’s public offering is designed to help “de-leverage the company,” said Foodmaker Chief Financial Officer Charles W. Duddles. In addition to the equity offering, Foodmaker hopes to raise up to $300 million through a debt offering.
“That (debt offering) together with the proceeds of the equity offering will be used to pay down (old debt),” Duddles said. “We’re taking advantage of lower interest rates in the marketplace.”
Duddles said the company’s current owners would retain 51% or more of the company’s stock after the offering, which would be completed during 1992.
Foodmaker, which was founded in 1950 in San Diego, became a wholly owned subsidiary of St. Louis-based Ralston Purina in 1968. It remained part of the Ralston Purina Co. until a group of its managers completed a $400-million leveraged buyout in September, 1985.
Foodmaker went public for the first time in 1987, at $13.50 per share, netting $56.9 million for the company. Foodmaker used most of the offering’s proceeds to pay down debt incurred in the 1985 LBO. Foodmaker in 1988 added to its debt level by acquiring the Chi-Chi’s restaurant chain for $230 million.
Just 18 months after Foodmaker went public, Foodmaker’s managers again acquired the company in a leveraged buyout that returned $19.125 per share to shareholders. Analysts at the time described the $19.125 per-share offer as fair to shareholders. Foodmaker’s stock closed up $7.15, at $18.78, after the buyout was announced.
Foodmaker reported $1.7 million in net income on $1.2 billion in revenue for the year ended Sept. 29. The company reported $9 million in net income on $1.1 billion in revenue during the previous fiscal year. Duddles linked the drop in net income to nationwide economic slowdown and a harsher tax rate that went into effect in 1991.
While Foodmaker’s equity and debt offerings are designed to reduce debt, Chart House’s deal with Islands fits the company’s “overall strategy of developing lower- and mid-priced restaurant concepts that complement our flagship Chart House division,” Chart House Chairman John M. Creed said.
Chart House’s attempt to diversify its role as a higher-end dinner-house chain “makes economic sense,” said Steve Rockwell, a Baltimore-based analyst with Alex. Brown & Sons. “There’s a tough economy right now . . . and Chart House sees the need to step down in terms of their position in the marketplace to a segment that might not be as economically sensitive as the (higher-priced) dinner-house segment.”
“If you look at some of the companies that are doing the best right now, they’d be similarly positioned to the Islands restaurants,” Rockwell said.
As important, Rockwell said, the Islands deal should allow Chart House to grow faster by adding more restaurants. “With Chart House alone, it’s hard to open more than five or six locations a year,” Rockwell said. “But, with (less-expensive) Islands, they should be able to open way more units.”
Under terms of the deal, Chart House will pay no upfront fees for the first 50 Islands outlets it operates. Islands Restaurants will receive 2% of the gross sales for the Islands outlets operated by Chart House, Creed said.
Islands’ bill of fare includes gourmet burgers, french fries, chicken sandwiches, soft tacos, salads and tropical beverages.
Foodmaker
TOTAL SALES IN MILLIONS OF DOLLARS
Year Jack in the Box Chi-Chi’s 1987 $655.1 $198.2* 1991 $980.0** $460.0**
RESTAURANT LOCATIONS
Year Foodmaker Chi-Chi’s 1988 897 185 1991 1,100 220
Source: Foodmaker
