El Torito’s Parent to Acquire Troubled Koo Koo Roo Chain

Koo Koo Roo Inc., the West Los Angeles-based chain of chicken eateries that has won customers but faltered financially, said Wednesday it will be acquired by Family Restaurants Inc., the privately held, Irvine-based owner of El Torito and Chi-Chi’s restaurant chains.

The deal, valued at $158 million, would create a publicly held, 325-unit restaurant company to be known as Koo Koo Roo Enterprises.

The new company, which would have restaurants in 31 states and 12 countries, plans to be headquartered at Koo Koo Roo’s current offices on Santa Monica Boulevard. It would be headed by Kevin Relyea, Family Restaurants’ chief executive, chairman and president. Former Chrysler Corp. Chairman Lee Iacocca, now chairman of Koo Koo Roo, and William Allen, its chief executive, would become board members.

Koo Koo Roo stockholders must still approve the deal.

The combination would improve the new company’s buying power while allowing it to expand, perhaps by selling chicken and Mexican food under one roof, 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 could benefit from the management expertise at privately held Family Restaurants, the cost savings that comes from a larger operation and the ability to obtain financing for 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.”

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 could ultimately benefit stockholders.

“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, 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,” said restaurant consultant Janet Lowder. She said that although Koo Koo Roo restaurants are busy and crowded, the company has been unable to get “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.

Koo Koo Roo isn’t Family Restaurants’ only new undertaking. Relyea also said Wednesday that the company plans to open an El Torito Express fast-food restaurant outlet in Pasadena this month.

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.

When the deal closes in about three months, it would pay about $146 million to buy Koo Koo Roo’s stock and will assume $12 million of its debt. Koo Koo Roo shareholders would 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, emphasizing healthy alternatives to fast food.

The company grew quickly, opening restaurants across the West and selected spots on the East Coast and snapping up unrelated companies. 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 hired Allen, a former senior vice president for Marriott Corp., and later appointed Iacocca as chairman.

Allen has implemented a major restructuring and said a deal to sell its Arrosto Coffee business should be completed on Friday. Efforts continue to unload its Color Me Mine ceramic chain.

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