Karcher Selling Carl’s Jr. Stake to Pay Off Debt

Embattled fast-food pioneer Carl N. Karcher will yield his dominant stake in the Carl’s Jr. restaurant chain to an Orange County investment group and get a load of debt off his back under a deal expected to be announced today.

The Orange County investor group that will control one-third of Carl Karcher Enterprises also hopes to persuade the board to allow the 76-year-old Karcher to return to the management team, possibly in the largely ceremonial role of chairman emeritus. The board ousted Karcher as chairman on Oct. 1.

The deal--to be completed later this month--is aimed at helping Karcher resolve his most troublesome financial difficulties while allowing him to maintain some presence at the company he founded in 1941 and helped promote as a colorful TV pitchman. Karcher also will become a limited partner in the investment group, with some influence over how its shares are voted.

The deal also could finally help the hamburger chain put a bitter management feud behind it and focus on regaining market share lost to giant national fast-food companies.

Karcher would not comment Tuesday night on the deal. “I find that I put my foot in my mouth and catch trouble from (attorneys) if I talk about these things,” he said in a telephone interview.

The Orange County investors seem to support efforts by new management--moves objected to by Karcher--to follow the lead of other fast-food companies offering lower-cost items, revamped menus and advertising to attract patrons and reverse a revenue slump.

But the chain’s prices are still higher than competitors’, a key issue for many consumers in a sluggish economy.

Company officials on Tuesday would not comment on the loan restructuring or the possibility of Karcher rejoining the management team. “We knew that (Karcher) was working on (a restructuring), but we didn’t know if it was close to being completed,” Karcher Enterprises spokesman Roger Pondell said.

Karcher’s personal attorney, Andrew Puzder, who played a key role in the negotiations with Union Bank, also declined to comment on the deal. “At the moment there’s nothing I can tell you,” he said late Tuesday night.

Under the deal, a limited partnership led by title industry executive William P. Foley II has agreed to help Karcher restructure a delinquent personal loan from Union Bank that has grown to nearly $26 million with interest and fees, sources close to the deal said Tuesday.

The loan, for which Karcher pledged 3.9 million Karcher Enterprises shares as collateral, is threatening to wreck Karcher’s personal finances. The fast-food magnate has been stung by failed real estate ventures in Southern California, the shrinking value of his Karcher Enterprises stock and ill-advised investments in a handful of troubled companies.

Karcher has linked his deepening financial problems to the Karcher Enterprises board’s decision late last year to reject a proposed buyout that would have given him cash needed to pay off his personal bank loans. Board members rejected Karcher’s bid of $9.50 a share, made in conjunction with a Los Angeles investment firm, saying the company was worth more.

The company and Karcher subsequently explored but did not complete a pair of deals that would have allowed the businessman to exchange company shares for as much as $16 million.

In the deal to be announced today, Karcher would get much-needed financial help. He would turn over 3.9 million shares--22% of Karcher Enterprises’ stock--to the investment group, in which he would be a limited partner. The shares would be used as collateral for financing needed to restructure the Union Bank loan. The partnership also would use securities that members hold in other companies as collateral.

Sources said that Foley, as general partner, would vote the partnership’s shares as a block. Foley and one other investor, Ron Lane, also are expected to seek seats on the Karcher Enterprises board.

Foley, an acquaintance of Karcher’s, has been working since October to help rescue the fast-food mogul from his financial difficulties.

Foley would not comment on the deal or on his plans once the debt restructuring is completed. But in the past Foley, who is chairman of Fidelity National Financial Inc. in Irvine, has described his role at Karcher Enterprises as a “mediator” interested in bringing together Karcher and Karcher Enterprises President Donald E. Doyle and boosting the company’s stock price.

It was uncertain Tuesday whether the transaction would soften Karcher’s feud with longtime board members and Doyle over the company’s strategic direction. The board replaced Karcher as company chair with board member Elizabeth A. Sanders after Karcher demanded the resignation of Sanders, as well as directors Daniel Holden and Peter Churm.

Same-store sales--those at outlets open more than a year--at the 650 Carl’s Jr. restaurants have been falling for nearly four years. The company is experimenting with a new, value-oriented menu that features items more in keeping with the public’s demand for good-tasting food that is generally less expensive than the fare at Carl’s Jr.

Later this month, the company will update investors on the “value menu” being tested at a handful of restaurants in California. Doyle has said that the lower-cost menu is necessary if the company is to boost revenue and profit.

Foley in October led a group of four investors who paid off a $4.8-million personal bank debt that had threatened to topple Carl Karcher’s personal fortunes and wreck his chances of regaining a role at Carl’s Jr.

As part of that deal, Foley’s group assumed control of 650,000 shares of Karcher Enterprises stock that the founder had used to secure the $4.8-million loan from Commercial Center Bank in Santa Ana.

Since settling the Commercial Center Bank loan, Karcher has concentrated on negotiations with Union Bank. The restructuring of the Union Bank loan expected to be announced today would be completed by mid-December, sources said.

Karcher and the current directors have been feuding since the summer, when the company rejected Karcher’s controversial plan to test-market Green Burrito-brand food products at a handful of Carl’s Jr. restaurants. Karcher insisted the test would succeed and give Carl’s Jr. a new product line that would boost profit and revenue. But Doyle has maintained that market research simply doesn’t support Karcher’s contention.

Just last week, Karcher issued a press release that accused Doyle of making “unfair, inaccurate, misleading, untrue . . . (and) simply false” statements about him. Karcher also demanded that Doyle “publicly admit that your statements were false.”

In late 1992, Karcher held more than 6 million shares of Karcher Enterprises’ common stock. He has been selling off shares in recent months, however, to pay off his debts. After the restructuring he would hold about 1 million shares outright--about 5.5%.

In Monday’s Nasdaq trading, Karcher Enterprises stock closed unchanged at $9.125 a share.

Karcher Chronicles

AUGUST

* Proposal rejected: Carl Karcher Enterprises board rejects proposal by founder Carl N. Karcher to sell Green Burrito products at some Carl’s Jr. restaurants.

* Resignations requested: Karcher asks board members Peter Churm, Elizabeth A. Sanders and Daniel Holden to step down. Each refuses.

SEPTEMBER

* Proxy battle: Karcher threatens to solicit shareholder support to oust the board, saying it is forcing him into bankruptcy.

OCTOBER

* Karcher ousted: Karcher is removed as chairman and replaced by Sanders, a 10-year Karcher director and family friend. Karcher remains on the board as a director.

* Conspiracy alleged: Karcher says board members kept him in the dark and had conspired since January to oust him. President Donald E. Doyle denies any plot.

* Stock threatened: While friends rally in support of Karcher, Commercial Center Bank in Santa Ana says that unless he repays a delinquent $5.3-million loan secured by 650,000 shares of Karcher Enterprises stock, the bank may sell the shares.

* Financial rescue: Four Orange County businessmen, led by title insurance executive William P. Foley II, agree to pay off the $5.3-million debt in exchange for a 4% stake in the company. Karcher remains in default to Union Bank on a $25.8-million loan secured by 3.9 million shares.

* More shares sought: Karcher continues negotiations with Union Bank on the defaulted loan. Foley’s group agrees to work with Karcher.

NOVEMBER

* Bigger stake: Foley group forms a partnership to pay off the Union Bank loan and take control of the shares Karcher has pledged as collateral. The group, which includes Karcher, would control about 34% of Karcher Enterprises stock.

Source: Times reports

Researched by JANICE L. JONES / Los Angeles Times