Irvine Firm Selling Coco’s and Carrows

Financially troubled Family Restaurants Inc. has agreed to sell its nearly 330 Coco’s and Carrows family-style restaurants to Flagstar Cos. Inc. in a deal valued at $306.5 million, the companies said Monday.

The acquisition of the 170-unit Coco’s and 157-unit Carrows chains would transform Spartanburg, S.C.-based Flagstar, which operates the El Pollo Loco and Denny’s chains, into one of California’s largest restaurant operators, with more than 900 eateries in the Golden State.

In contrast, the sale would leave Irvine-based Family Restaurants with just 300 Chi-Chi’s, El Torito and Charley Brown’s locations across the country. The privately held company said it will use proceeds from the sale to pare its debt.

Executives at Family Restaurants declined to say if the deal would result in layoffs at the company’s corporate headquarters. But Flagstar executives said that employment at Coco’s and Carrows should remain constant because the chains will continue to operate.

Coco’s and Carrows combined revenue is believed to be about $500 million. Flagstar reported $2.6 billion in revenue in 1995.

Some industry analysts believe that Flagstar eventually will reconfigure its holdings in the state, perhaps by turning some Denny’s locations into Coco’s or Carrows because customers typically spend more at those restaurants than at a Denny’s.

But Flagstar Chairman James B. Adamson said during a telephone interview that the chains will remain largely independent.

“Coco’s and Carrows are two very powerful brands, particularly in California and Arizona,” said Adamson, who joined Flagstar as chairman in February 1995. “We’re going to get some synergies from overhead things--like financial and purchasing--but we’re looking to grow all of our brands, including Denny’s and El Pollo Loco.”

Adamson said he isn’t worried outlets in California will account for 30% of Flagstar’s revenue after the deal is completed in May.

“Maybe I’m more bullish on California’s economy than some people,” Adamson said. “But we think it’s an awfully good place to be. The economy is rebounding. . . . it’s my belief that California is going to be an even better place to be.”

Flagstar began negotiating for Coco’s and Carrows late in 1995, shortly after Family Restaurants announced it would attempt to sell some or all of its holdings to reduce its heavy debt load.

For Flagstar, the deal represents yet another step in an ongoing turnaround attempt being orchestrated by Adamson, who was brought on board in February 1995 by the investment firm of Kohlberg Kravis and Roberts, which owns 47% of Flagstar.

But the turnaround has been slower than some restaurant industry analysts had expected. In mid-February, Flagstar reported a $101.4-million loss from continuing operations for the fourth quarter ended Dec. 31 and a drop in revenue to $576.7 million from $659.5 million. Flagstar has reported more than $2 billion in losses since 1990.

Restaurant industry analysts said that Flagstar’s challenge will be finding enough money to properly market its five chains and to finance growth in the hotly competitive family restaurant niche.

“Flagstar is getting a couple of good things with Coco’s and Carrows,” said Janet Lowder, a restaurant industry consultant in Rancho Palos Verdes. “The restaurants usually are in good locations and they’ve got fairly good names. But there’s the risk of Flagstar having to cannibalize its marketing and promotions with five chains.”

When the deal is completed, Flagstar will have more than 2,600 restaurants, including 1,500 Denny’s, 600 Hardee’s hamburger restaurants, 217 eateries operated by Irvine-based El Pollo Loco and nearly 330 Coco’s and Carrows restaurants. Flagstar also is acquiring licensing rights to nearly 240 Coco’s in Asian markets.

Family Restaurant President Kevin Relyea said in a news release that the sale of Carrows and Coco’s “demonstrates our commitment and resolve to concentrate all of our resources on Chi-Chi’s and El Torito.”

Family Restaurants has struggled since emerging from bankruptcy early in 1994. In recent months, it sought several deadline extensions from lenders. The company also has been dogged by stalled sales and operating losses at its Chi-Chi’s unit.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Family Restaurants Inc. at a Glance

Headquarters: Irvine

Founded: 1986

Chief executive officer: Kevin Relyea

Restaurants after sale of Carrows, Coco’s: Four chains, with 319 outlets

Remaining properties:

* El Torito: More than 100 sit-down, Mexican-style restaurants

* Chi-Chi’s: More than 200 sit-down, Mexican-style restaurants

* Casa Gallardo: About 25 sit-down, Mexican-style restaurants

* Charley Brown’s: About 25 restaurants offering beef, seafood, pasta

BACKGROUND BRIEF

1986: Restaurant Enterprises Group (REG) created when executives complete leveraged buyout of W.R. Grace & Co.’s restaurant businesses.

1993: REG voluntarily enters bankruptcy to restructure a heavy debt load.

1994: REG emerges from bankruptcy with new name, Family Restaurants Inc., and acquires Chi-Chi’s restaurants from San Diego-based Foodmaker Inc., parent of the Jack in the Box chain.

1995: Family Restaurants says it plans to sell some or all its restaurants to reduce debt.

1996: Family Restaurants announces plans to sell Coco’s and Carrows restaurants to Flagstar Cos. of Spartanburg, S.C.

Sources: Family Restaurants Inc.; Times reports; Researched by GREG JOHNSON / Los Angeles Times