Carl Karcher Offers Buyout to Shareholders
Fast-food magnate Carl Karcher, backed by a Los Angeles investment group, launched a buyout offer Tuesday to return his Carl’s Jr. hamburger empire to private ownership.
If the proposal is accepted, the 75-year-old Karcher would be able see his Carl Karcher Enterprises Inc. operate without the scrutiny of government regulators and dividend-minded stockholders for the first time since it went public in 1981.
“I think here’s a management team that always wanted to run it like a private company,” said Doug Christopher, an analyst for the brokerage of Crowell, Weedon & Co. in Los Angeles. “They won’t have to answer to stockholders or the SEC ever again.”
Investment company Freeman Spogli & Co. is teaming up with the Carl and Margaret Karcher Trust to offer $9.50 apiece for the 18 million outstanding shares of Karcher Enterprises. That would put the value of the deal at $171 million.
The trust already owns 6.2 million of those shares, or a third of the total. Freeman Spogli would provide $85 million in equity capital, giving it a majority ownership stake. Group founders Brad Freeman and Ron Spogli were both involved in Carl Karcher Enterprises’ initial public stock offering.
The partners said they also have a letter from an unidentified securities firm that says it is “highly confident” of being able to lend $130 million in secured senior notes to complete the financing package.
The cost of the buyout, which must be approved by shareholders, would include financing and some payment of existing debt.
The offer will first be reviewed by a committee of the company’s directors who are neither Karcher Enterprises officers nor family members. The committee’s chairman, Furon Co. Chairman Emeritus Peter Churm, could not be reached for comment Tuesday.
The management buyout offer is below the current market value of the stock, which closed at $10 in Tuesday’s trading on the NASDAQ market. After Carl Karcher Enterprises announced in October that it was expecting an offer to return the company to private ownership, the stock rose to that level from its previous trading range of $7 to $8.
Speculation about the possibility of a management buyout has driven up the stock price, said Bill Wardlaw, a partner in Freeman Spogli. “The market got ahead of itself,” he said.
For Karcher, the buyout would be an opportunity to shed the responsibilities of running a large company whose stock is publicly traded. He would no longer have to worry about the Securities and Exchange Commission, which sued several Karcher family members in 1988, alleging that they were involved in illegal insider trading in company stock. (The case was settled by payment of $187,000 to the federal agency.) It would also allow the company to concentrate on long-term goals without having to satisfy stockholders’ demand for short-term profits.
Karcher, who could not be reached for comment Tuesday, has said in the past that national fast-food companies have made offers to buy his chain, but he always turned them down. As part of the new proposal, he has pledged not to back any other offers.
Such competing fast-food companies as Wendy’s, Hardee’s and Pepsico--which operates the Irvine-based Taco Bell chain--have reportedly had their eye on Carl Karcher Enterprises. With more than 600 Carl’s Jr. restaurants in four states and four foreign countries, the company could be a desirable target for a competitor looking to grab its prime locations in the California market, analysts said.
Carl Karcher started out as owner of a single hot-dog cart in central Los Angeles in 1941. The first Carl’s Jr. opened in the 1950s in Anaheim, where the company still has its headquarters. Karcher himself has risen to celebrity status, appearing in all of the company’s TV commercials.
The chain grew to prominence in Southern California because of its emphasis on food quality. But that formula, by which the company increased its annual revenue to nearly half a billion dollars, has not worked as well in the value-conscious 1990s. The higher prices necessary to maintain the Carl’s Jr. standard for quality have sent fast-food customers to competitors like Taco Bell and McDonald’s, which offered deep discounts on certain key items.
Only recently has the company caught the discounting spirit. In June, its Carl’s Jr. restaurants began selling 99-cent hamburgers as a menu addition.
For its latest fiscal year, Carl Karcher Enterprises reported a profit of $13 million, unchanged from the year before. Annual sales came to $465.8 million, down from $469.1 million. The company blamed the recession for lower sales and lack of earnings gains.
Some analysts have said that the company’s stock could be worth as much as $14 a share, making the buyout proposal a surprise.
“Obviously it was below what I thought the company was worth,” said Christopher of Crowell, Weedon.
Under private ownership of his company, Karcher would remain as chairman but would probably have little involvement in day-to-day management, Wardlaw said. “He will stay as chairman as long as he wants to be chairman,” Wardlaw said.
The company’s operations were handled by Donald Karcher, one of Carl’s younger brothers, who died of lung cancer earlier this year. Neither Donald Karcher’s post--the presidency--nor some other key managerial posts have been filled, giving some analysts a sense that the company is rudderless.
A buyout, they say, could help give the company new direction and allow it to return to the freewheeling style that it once had under the entrepreneurial Karcher family.
“From our perspective, Carl loves this company greatly, and he wants to make sure the best happens for it,” Wardlaw said. “He saw this (buyout) as an opportunity for new leadership.”
