Koo Koo Roo to Keep Name in Marriage to O.C. Chain

Family Restaurants Inc., the Irvine-based owner of the El Torito and Chi-Chi’s restaurant chains, said Wednesday it will acquire Koo Koo Roo Inc., the chain of chicken eateries that has won customers but faltered financially.

The deal, valued at $158 million, will create a publicly held 325-unit restaurant chain known as Koo Koo Roo Enterprises, whose operations last year would have produced $532 million in sales and $61 million in losses.

The new company will have restaurants in 31 states and 12 countries and be based in Los Angeles. It will be headed by Kevin Relyea, Family Restaurants’ chief executive, chairman and president. Former Chrysler Corp. Chairman Lee Iacocca, who’s now chairman of Koo Koo Roo, and William Allen, its chief executive, will become board members.

The combination will improve the new company’s buying power while allowing it to expand, perhaps by selling chicken and Mexican food under one roof, Relyea said.

But it also could mean fewer jobs. Over the next six weeks, company officials will evaluate personnel and decide whether to close some locations, Relyea said.

Analysts said the merger could prove to be a life jacket for Los Angeles-based Koo Koo Roo, which has not had a profitable year since it went public in 1991. The company will benefit from the management expertise at privately held Family Restaurants, the cost savings that comes from a larger operation and the ability to finance new restaurants.

“Family has everything that Koo Koo Roo needs,” said Fred Roberts, a Los Angeles investment banker who advised Koo Koo Roo on the deal. “It’s a perfect match of strengths and needs.”

Koo Koo Roo’s stock dipped on the news Wednesday, closing at $2.44, down 44 cents, in Nasdaq trading. But insiders said the acquisition ultimately could benefit shareholders.

“Koo Koo Roo shareholders will finally have a management team that will deliver the profits that this chain is capable of generating,” said Jonathan Sokoloff, a partner with Leonard Green & Partners, a Los Angeles buyout firm that owns 16% of Family Restaurants. “It’s great for them.”

Koo Koo Roo and Family Restaurants began talking in February, after the chicken chain approached the Mexican food giant, Relyea and Allen said Wednesday. Family Restaurants was seeking a new “growth vehicle” and Koo Koo Roo needed money and management strength, they said.

“We believe we’ve found a great partner,” Allen said.

Analysts agreed.

“Koo Koo Roo definitely needs something in terms of a joint venture partnership or somebody to merge with it to go forward because I don’t think they’re capable of standing on their own as they are,” analyst Janet Lowder said. “The perception is [that Koo Koo Roo is] busy. It’s just getting those sales to fall to the bottom line.”

For Family Restaurants, Wednesday’s deal is its first big move since the 1996 sales of its Coco’s and Carrows chains to South Carolina-based Advantica Restaurant Group for $300 million.

But like Koo Koo Roo, Family Restaurants is unprofitable. The company turned a $17.5-million profit on operations last year, but interest payments on more than $200 million in debt and other expenses turned that into a $31.5-million loss. In the first quarter ended March 29, the company posted a $2.2-million operating loss on sales of $113.3 million.

Koo Koo Roo isn’t Family Restaurants’ only new undertaking. Relyea also said Wednesday that the company will open a fast-food restaurant, El Torito Express, in Pasadena this month. The company plans to open others throughout Southern California.

In advance of the formal merger, Family Restaurants will immediately loan the troubled operation $3 million, issue $21 million in notes and increase its line of credit by $20 million.

Under other terms of the deal, it will pay about $146 million to buy Koo Koo Roo’s stock and will assume $12 million of its debt. Koo Koo Roo shareholders will get one share of stock in the new company in exchange for each Koo Koo Roo share they currently own, giving them a 33% stake in the new company.

Koo Koo Roo was founded by two brothers in 1987 as a healthy alternative to fast food. Its main competitor is Boston Market, which has also hit rough waters.

The company grew quickly, opening restaurants across the West and selected spots on the East Coast and snapping up unrelated companies, such as a retail coffee outlet and a do-it-yourself ceramic chain.

Last year, Koo Koo Roo also bought the bankrupt Hamburger Hamlet chain.

But costs outran revenue, and losses through the end of last year topped $51 million.

In response, the company’s board sought new leadership earlier this year, first hiring Allen, a former senior vice president for Marriott Corp., and later appointing Iacocca as chairman of the board.

Allen has implemented a major restructuring effort, saving at least $8 million by closing restaurants and slashing administrative costs. However, those moves have not been enough to prevent a first-quarter loss of $15.2 million despite record revenue of $22.3 million.

The company is now selling its Arrosto Coffee business in a deal that should be complete on Friday, Allen said. The company is also trying to unload its Color Me Mine ceramic chain.

Before leaving the company in March, Koo Koo Roo’s former board chairman, Kenneth Berg, blamed some of the chain’s problems on a preferred stock financing scheme launched last year that backfired after investors took the preferred shares and converted upward of $50 million worth into common stock.

The conversion more than tripled the number of the company’s outstanding common shares, which in turn drove down the stock price, diluted earnings per share and scared away investors.

Allen, the new CEO, blamed much of the company’s troubles on mismanagement. He said the merger with Family Restaurants is largely an effort to tap into Relyea’s management prowess.

“Getting involved with [Family Restaurants] shows the level of confidence we have in Kevin and his management team,” Allen said.

Relyea took the reins at Family Restaurants in 1995, sold off the unprofitable Carrows and Coco’s chains and focused on shoring up its Mexican restaurants.

The acquisition of Koo Koo Roo still requires the nod from Koo Koo Roo stockholders. It already has been approved by both companies’ boards.

Times staff writer Debora Vrana in Los Angeles contributed to this report.

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Restaurant Buyout

Irvine-based Family Restaurants is buying the Koo Koo Roo chain in a deal valued at $158 million. Details on the two companies:

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Koo Koo Roo

Headquarters: Los Angeles

Acting chairman: Lee Iacocca

Business: Owns 38 Koo Koo Roo chicken restaurants in California, Florida and Nevada and 14 Hamburger Hamlet restaurants in California and Washington, D.C.

Employees: 3,100

Status: Public

Exchange: Nasdaq

1997 sales: $68.3 million

1997 loss: $29.4 million

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Family Restaurants

Headquarters: Irvine

Chairman/President/CEO: Kevin S. Relyea

Business: Operates 273 Chi-Chi’s, Casa Gallardo and El Torito Mexican-food restaurants in 30 states, including California, Ohio, Pennsylvania, Michigan, Illinois and Indiana.

Employees: 19,800

1997 sales: $463.7 million

1997 loss: $31.5 million

Status: Private

Source: Bloomberg News, Securities and Exchange Commission filings; Researched by JANICE JONES DODDS/Los Angeles Times