Seeking Control, CKE to Buy 557 Hardee’s
Looking to gain complete control of the Hardee’s burger chain, CKE Restaurants Inc. said Thursday that it plans to buy 557 Hardee’s restaurants from the former Flagstar Cos. in a deal valued at $415 million.
The acquisition, which had been rumored for months, gives CKE the capability to convert all 3,605 Hardee’s into Carl’s Jr. restaurants, giving Carl’s Jr. a long-sought nationwide presence.
The deal also stands to benefit three other Orange County-based restaurant chains, El Pollo Loco, Coco’s and Carrows. All are based in Irvine and all are owned by South Carolina-based Advantica Restaurant Group Inc., which changed its name from Flagstar when it emerged from Chapter 11 bankruptcy reorganization earlier this month.
Advantica President James Adamson said he will plow $170 million--nearly half of the sale’s proceeds--into improving and growing the company’s remaining holdings. Advantica also owns the Denny’s coffee shop and Quincy’s Family Steakhouse chains.
Analysts cheered the buyout.
CKE “is getting their largest franchisee and some good territory that will allow them to grow a lot without increasing their overhead,” said Alan Hickok of Piper Jaffray in Minneapolis.
Steven Rockwell, restaurant analyst at BT Alex. Brown in Baltimore, raised his 1998 earnings estimate on CKE Thursday by 20 cents a share, to $1.59.
Investors also loved the deal.
CKE shares jumped 7.3%, or $2.63, to $38.25 on the New York Stock Exchange. The company’s shares opened 10% lower on Thursday, reflecting a stock dividend that is payable Feb. 4. Advantica shares rose 12.7%, or $1.25, to $11.06 in Nasdaq trading.
CKE already owns Hardee’s Food Systems Inc., franchiser of the Hardee’s name and owner of 867 Hardee’s restaurants. Franchisees own another 2,181 Hardee’s.
At 557 restaurants, Advantica was Hardee’s largest franchisee and its biggest adversary, having filed an arbitration case claiming that Hardee’s had mismanaged the brand. As part of the deal, Advantica is dropping its claim.
CKE executives said it is too early to tell whether they eventually will phase out the Hardee’s name in favor of Carl’s Jr.
“We now have the ability to do it, but Hardee’s is very popular in the Southeast,” said Andrew F. Puzder, CKE’s executive vice president and general counsel. “We’re going to listen to our customers, and do what makes the most sense.”
The company already is dabbling with the idea of phasing out the Hardee’s name in two test markets. It converted 47 Oklahoma City-area Hardee’s to a Carl’s Jr./Hardee’s format, which serves Hardee’s popular breakfast items and Carl’s Jr. burgers and chicken sandwiches at lunch and dinner. Sales rose nearly 20% following the conversions. Twenty-nine Hardee’s in Peoria, Ill., were recently converted to a similar format.
There’s also some fixing up to do at the Advantica Hardee’s. For starters, those units were on a pace to gross $556 million in sales in 1997, which would be a 7.8% drop from 1996. Sales at restaurants open at least a year--a key measure of growth--fell 8.2% in the nine months ended Oct. 1, the latest figures available.
Worse, operating profits fell 15.6%, to $21 million, in the nine-month period.
Puzder said there are no near-term plans to close any of the Hardee’s that CKE is acquiring. Under terms of the deal, CKE will pay $369 million in cash to Advantica, and assume $46 million in debt. CKE will finance the cash portion of the deal through either a stock or bond offering, Puzder said.
Rockwell, the BT Alex. Brown analyst, noted that CKE is paying a much higher price for Advantica’s Hardee’s stores--about $745,000 per restaurant--than it did for the Hardee’s Food Systems units, at about $377,000 per restaurant. “The first Hardee’s deal was an A-plus acquisition,” Rockwell said. “This was an A or A-minus, but it’s still a real good deal.”
Despite their woes, the Advantica Hardee’s “are actually performing better than the overall Hardee’s system,” said Andy Barrish, restaurant analyst at BancAmerica Robertson Stephens. “They’re higher volume and higher margin units.”
The results of the deal, which is to be completed in March, will be immediate. CKE will get every dollar of sales and profit generated by the 557 Hardee’s, instead of simply the 4% of sales it was getting as the franchisor.
Advantica, meanwhile, hasn’t decided exactly how much it will reinvest in each of its five remaining chains, said spokeswoman Karen Randall. The amount will be based on the rate of return that each concept can generate.
The 486-unit Coco’s and the 156-unit Carrows chains are holding their own, but the 244-unit El Pollo Loco chain saw operating profits slip 4.6% in the nine-month period.
