Plans to combine El Torito and Chi-Chi's, the nation's two largest Mexican-food restaurant chains, moved ahead Tuesday with the support of El Torito's majority stockholder.
The combination of El Torito, a West Coast chain, with East Coast-based Chi-Chi's would set up a neck-and-neck race with Taco Bell to establish the first nationwide chain of sit-down Mexican-style restaurants.
Under a complicated deal announced Tuesday, a group led by Foodmaker Inc. of San Diego, the owner of Chi-Chi's and Jack-In-The-Box, will pay an undisclosed sum for debt-plagued Restaurant Enterprises Group of Irvine. REG operates 577 restaurants, including El Torito as well as Coco's, Carrows and Reuben's.
The new operating company will have a total of 350 El Torito and Chi-Chi's locations. Taco Bell, the Irvine-based subsidiary of Pepsico Inc., recently launched plans to build its own nationwide chain of more than 300 Mexican-style dinner houses.
For the Foodmaker group, creating a truly national chain of Mexican restaurants will be challenging, said Janet Lowder, a restaurant analyst in Rancho Palos Verdes, particularly since Chi-Chi's offers blander fare than El Torito.
Eventually, she said, they must decide whether to "keep the El Torito name or change all the locations to Chi-Chi's. To have a truly national name you have to have one name; just because a company owns two brand names doesn't mean they have a national chain."
Foodmaker President Jack Goodall will serve as chairman of the new company, but REG will remain in Irvine for the foreseeable future, which is welcome news for 700 REG corporate employees in Orange County.
Foodmaker and its investment partners view REG as "an autonomous operating unit that will receive occasional guidance from Foodmaker," Chuck Duddles, Foodmaker's chief financial officer, said Tuesday.
The management team assembled by REG President Norm Habermann evidently will remain at the helm after the deal is completed. "We expect to continue running the company," said Mike Casey, REG's chief financial officer.
The new operating company will continue a cost-cutting plan initiated last year by Habermann. REG is closing underperforming restaurants, concentrating on the El Torito chain and converting some other units to Coco's and Carrows family-style restaurants, which have remained profitable despite the nationwide economic slowdown.
The new company's plan to strengthen Carrows and Coco's makes sense, Lowder said. "There's definitely growth there in today's market. . . . Family-style restaurants are performing better than dinner houses."
Duddles of Foodmaker conceded that "there's a lot of real marketing work to figure all that out."
Under Habermann, REG has turned a profit from its restaurant operations but has struggled unsuccessfully to deal with remnants of a $737-million debt created when a group of former W.R. Grace managers acquired the business in a 1986 leveraged buyout. REG has retired $380 million of that debt but has not been able to make payments on the rest since December. Because of that, REG's managers were forced to return their stock to Grace.
In May, a majority of REG's bondholders approved a sale to the Foodmaker group. Grace subsequently offered an alternative plan that was rejected. But Tuesday, it was announced that Grace had agreed to sell its stake to the Foodmaker partnership.
Grace's decision to sell the troubled restaurant chain "came about because both Grace and (Foodmaker's group) recognized that neither side could move forward without the other," said Mike Casey, REG's chief financial officer.
Terms of the deal call for approval of the sale by a U.S. Bankruptcy Court judge. In such a "prepackaged bankruptcy," both creditors and the debtor agree on a reorganization plan before making a court filing. That speeds the bankruptcy process along because there are few disagreements for the judge to settle.
An investment banker who is familiar with REG urged Grace earlier to accept the deal. "You'd like to avoid bankruptcy, but, frankly, it makes a lot of sense to do this prepackaged deal," said Lloyd Greif, president of Greif & Co. in Los Angeles. "The only prayer (REG has) of righting their ship is . . . through bankruptcy."
Observers said the bankruptcy plan should be approved relatively quickly because a majority of REG's bondholders and Grace, its largest single creditor, already support it.
Grace owns all but a small percentage of privately held REG's shares.
Foodmaker would own 33% of the new operating company. Its majority owners would be two investment companies: Leonard Green & Partners L.P. in Los Angeles and Apollo Advisors in New York.
Foodmaker and its partners hope to complete the deal late this year.
"This is truly a good deal for everybody," Casey said. "It's a good deal for bondholders, . . . a lot better than anyone could have expected back in December."
The deal would return about 94 cents on the dollar to senior bondholders and 65 cents on the dollar to holders of REG's subordinated debt. REG would also receive a $108-million cash infusion to finance restaurant upgrades.
Agreement Reached in Merger
Foodmaker Inc., parent company of Jack-In-The-Box, has acquired Restaurant Enterprises Group, which owns El Torito, Coco's, Reuben's and several other restaurant chains. The merger is expected to be completed by year's end. Names and numbers of restaurants owned by each company:
FOODMAKER INC. Name: Number Jack-In-The-Box: 1,165 Chi-Chi's*: 236 Total: 1,401 * East Coast chain of sit-down Mexican-style restaurants
RESTAURANT ENTERPRISES GROUP Name: Number Coco's: 156 Carrows: 126 El Torito: 120 Bob's, Jojo's and Allie's: 76 Casa Galardo: 28 Charley Brown's: 27 Reuben's: 20 Other dinner houses: 24 Total: 577 Source: Los Angeles Times files
Researched by GREG JOHNSON / Los Angeles Times