CKE to Sell Boston Chicken Franchise Rights : Retailing: Anaheim firm says that to increase shareholder profit it will refocus resources on its 650-unit Carl’s Jr. chain.
CKE Restaurants Inc. acknowledged on Friday that it bit off more than it could chew when it acquired rights last year to build up to 300 Boston Chicken stores in Southern California over five years.
CKE Restaurants, which wants to focus its resources on its 650-unit Carl’s Jr. chain, said it would turn over Southern California franchise rights to the popular Boston Chicken restaurant chain to a new company owned largely by Boston Chicken Inc., the Denver-based chain operator.
For the record:
12:00 a.m. April 10, 1995 For the Record
Los Angeles Times Monday April 10, 1995 Orange County Edition Business Part D Page 5 Financial Desk 2 inches; 48 words Type of Material: Correction
CKE Restaurants--A headline for a story on CKE Restaurants Inc. in Saturday’s Times misstated the terms of the transaction involving Boston Chicken. CKE transferred the operations and most of its rights in its Boston Chicken franchise to a new company and retained preferred stock that it can later convert to a stake of up to 35% in the company.
The Anaheim company acquired the Boston Chicken franchise in January, 1994, for an undisclosed price and since has invested $35 million in it. CKE executives at the time described the Boston Chicken franchise as an antidote for flagging profits at the Carl’s Jr. chain, which had been buffeted by lower-priced competitors.
“The question is what changed, and the answer is that the capital intensity (of developing the Boston Chicken chain) is clearly a big issue,” said Loren Pannier, CKE’s chief financial officer. “The Carl’s side of the business is beginning to move in a positive direction, and there’s a growing need for capital for store remodeling and accelerating expansion.”
Pannier said the latest deal was driven by the demand of CKE Chairman and Chief Executive William P. Foley II that shareholder values be increased.
“Our chairman has spoken loud and clear,” Pannier said. “The best way to (raise value) is to increase earnings quickly, and . . . the best way to do that is with the Carl’s Jr. business.”
Restaurant industry analysts who have in the past criticized CKE Restaurants for failing to pump money into the Carl’s Jr. chain welcomed the announcement.
“I’ve always been surprised that the company hasn’t concentrated its assets and resources on the Carl’s chain,” said Doug Christopher, an analyst at Crowell, Weedon & Co. in Los Angeles. “Let’s just hope they mean it this time.”
Another analyst who has been frustrated by CKE’s strategic shifts said, “It seems that every year it’s something different.”
Change has been constant at the company since 1992, when its board hired veteran food industry executive Donald E. Doyle as president and embarked upon a restructuring that was designed to bolster lackluster restaurant sales and profits.
Doyle’s attempt to recast Carl’s Jr. as a low-price alternative for bargain-hungry consumers put him at odds with company founder and longtime Chairman Carl E. Karcher. The disagreement escalated into a bitter board battle, and Karcher was forced from office in 1993.
Karcher subsequently returned as chairman emeritus after an investor group led by Foley took control. In January, 1994, Doyle unveiled the Boston Chicken franchise deal. In March, 1994, Foley was named chairman and soon voiced concern about the company’s direction under Doyle, who resigned in October.
CKE appeared to change gears again in June when it agreed to test-market Green Burrito brand Mexican-style foods at a handful of its Carl’s Jr. locations. But the agreement was dashed when Green Burrito operator GB Foods in Newport Beach alleged in a recent lawsuit that CKE had breached terms of the test program.
According to terms of the agreement announced Friday, Boston West, a new, privately held company, will take over operation of existing Boston Chicken stores developed by CKE’s Boston Pacific subsidiary. Boston Pacific President Kerry Coin and about 1,450 store employees will transfer to the new Boston West company and will remain in an existing CKE building.
Boston Chicken Inc. will pump $65 million into the new company, making Boston West “one of the largest and best capitalized Boston Chicken development areas in the country,” Foley said.
CKE Restaurants will receive preferred stock, convertible at a later date to common stock worth up to 35% of the new company. Stock in the new company will be converted to common shares when Boston West becomes profitable, Pannier said.
CKE shares fell 25 cents Friday to close at $7.25 on the New York Stock Exchange, while Boston Chicken was unchanged at $17.625 in Nasdaq trading.
