El Torito’s Parent Will Buy 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 has agreed to be acquired by Family Restaurants Inc., owner of the El Torito and Chi-Chi’s restaurant chains.
The deal, valued at $158 million, would create a 325-unit restaurant chain known as Koo Koo Roo Enterprises.The new company will have restaurants in 31 states and 12 countries.
The acquisition still requires the nod from Koo Koo Roo stockholders. It already has been approved by both companies’ boards.
The new company would be based in Los Angeles and headed by Kevin Relyea, Family Restaurant’s chief executive, chairman and president. Lee Iacocca, Koo Koo Roo’s chairman, and William Allen, its chief executive, would become board members.
The combination would improve the 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. Relyea said that over the next six weeks, company officials will evaluate personnel and whether to close some locations.
Analysts said the merger could prove to be a life jacket for Koo Koo Roo, which has not had a profitable year since it went public in 1991. The company would benefit from the management expertise at Irvine-based Family Restaurants, the cost savings benefits that come 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 eatery approached the Mexican food chain, 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.
Under terms of the deal, Family Restaurants 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.
To help finance a turnaround of Koo Koo Roo, Family Restaurants will loan the troubled operation $3 million, issue $21 million in notes and increase its line of credit by $20 million.
“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 major move since the company sold the Coco’s and Carrows chains to South Carolina-based Advantica Restaurant Group in 1996.
Family Restaurants turned a $17.5-million profit on operations last year, but interest paymets on more than $200 million in debt turned that into a $31.5 million loss.
The company also said Wednesday it will launch its first fast-food restaurant, El Torito Express, in Pasadena this month. The company plans to open others throughout Southern California.
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 $35 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 Chrysler Corp. savior Lee Iacocca as chairman of the board.
Allen has implemented a major restructuring effort, closing restaurants and slashing administrative costs.
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Times staff writer Debora Vrana contributed to this report.
