Weighed down by debt, the operator of the Reuben’s, Coco’s and El Torito restaurant chains said Tuesday that it will sell more than a fourth of its 587 restaurants to trim costs and position itself for future growth.
Most of the unwanted restaurants are outside of Restaurant Enterprises Group’s stronghold in the western United States, REG President Norm Habermann said. The company, which hopes to generate about $48 million from the restaurant sales, will use the proceeds to build new restaurants and refurbish old ones.
REG, based in Irvine, will keep its Coco’s, Carrows and El Torito restaurants but sell some lackluster Reuben’s and Charley Brown’s dinner-house locations. The sale won’t involve a string of recently acquired Bob’s Big Boy and Allie’s restaurants that are being converted into Coco’s and Carrows coffee shops.
The company said it will post a 1992 loss of as much as $220 million after it sets aside $43 million to cover costs involved in selling 169 restaurants and writes down $107 million in goodwill established when REG completed a 1986 leveraged buyout. REG also said it will report a $17-million pretax operating loss on sales of about $930 million.
The company has $275 million in debt left over from the leveraged buyout that turned W.R. Grace & Co.'s restaurant business over to a group of managers that included Orange County restaurateur Anwar Soliman. Soliman left the company before the deal was completed.
REG, which hopes to restructure its long-term debt by year’s end, is one of two locally based restaurant companies struggling to deal with debt taken on in 1980s buyouts. On Monday, Del Taco in Costa Mesa blamed an “onerous debt load” from a buyout for forcing it into bankruptcy proceedings. That buyout occurred when a management team acquired Del Taco from Soliman.
Both REG and Del Taco planned to pay off their debt through earnings. But restaurant industry profit margins are being hammered by competitors who are cutting menu prices to lure frugal consumers into their restaurants.
Concentrating on Coco’s and Carrows makes sense because “those chains are faring better in the recession than the dinner houses,” said industry analyst Janet Lowder at Restaurant Management Services, a Rancho Palos Verdes consulting company. “Consumers are downgrading” from more expensive restaurants, she said, “and that benefits Coco’s and Carrows.”
The picture is darker for REG’s more expensive Reuben’s, Charley Brown’s and El Torito chains, Lowder said, because “dinner houses are not faring as well, especially in Southern California, where a majority of their properties are.”
REG’s cash woes have also stalled a plan to renovate the Reuben’s chain, Lowder said. “Because of the LBO (debt), declining sales and the recession, they’ve not had the capital to do the refurbishing,” she said. “They’re probably losing customer counts, more than had the units been kept up to date.”
Habermann said the exact number of restaurants to be sold is “dependent upon what kind of offers we get. . . . We’re hopeful we can complete the divestiture . . . within the next 18 to 20 months.”
About 70% of REG’s restaurants are in California. Most of the units to be sold are in states other than California, Arizona, Washington, Oregon, Nevada and New Mexico.