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McDonald’s to Buy Boston Market

TIMES STAFF WRITER

Taking its growth-by-acquisition strategy to a new level, hamburger giant McDonald’s Corp. said Wednesday it will buy most of the Boston Market restaurant chain from its bankrupt parent for $173.5 million. The deal marks the first purchase by McDonald’s of a national chain, and expands on its plan to diversify beyond its staple burger business.

McDonald’s Golden Restaurant Operations Inc. unit will pay cash and assume an undisclosed amount of liabilities for 751 Boston Market restaurants owned by Colorado-based Boston Chicken Inc., rights to another 108 franchise locations and the brand name.

The acquisition will help spur the U.S. growth of McDonald’s, which has been relatively stagnant in recent years, and prevent it from further saturating the market with its own restaurants, analysts said. McDonald’s said it will keep an unspecified number of locations as Boston Markets and switch others to its burger restaurants as well as the newer Chipotle Mexican Grill and Donatos Pizza chains. McDonald’s bought the 150-unit Donatos chain in the Midwest in May of this year, and a stake in the 40-unit, Denver-based Chipotle in 1998.

Analysts said the Boston Market deal is a winner for the real estate alone.

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“They’re getting a very good deal for not much more than the value of the land,” said analyst Paul Westra at Credit Suisse First Boston, who rates McDonald’s a “strong buy.”

The Boston Market brand is “well-established, with excellent employees, quality products and loyal customers and future growth potential,” said McDonald’s Chairman Jack M. Greenberg in a statement.

The deal makes for some strange bedfellows. Longtime McDonald’s competitor CKE Restaurants Inc., the Anaheim-based owner of the Carl’s Jr. burger chain, operates 56 Boston Market restaurants in Southern California and at one time had franchise rights to build 300 stores in Southern California and Sacramento.

CKE executive Robert Wilson said he doesn’t yet know what the McDonald’s deal will mean to the franchises that CKE has an interest in and operates.

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“We’ll have to see what the future of the brand is in light of this announcement,” Wilson said. “I’m sure over the next several weeks it will play out and we’ll find out.”

Dick Adams, head of an association of McDonald’s franchisees that makes up about 10% of the chain, said the deal does not bode well for Boston Market’s future.

“They tried to be a dinner place, that didn’t work, so they went into the lunch business, which is in direct competition with McDonald’s,” he said. “They will remain in direct competition if they continue to focus on the lunch sandwich. I think [McDonald’s] will turn them into other restaurants, and the Boston Market chain will go away or become real small.”

McDonald’s spokesman Charles Ebeling said the company doesn’t view Boston Market as direct competition.

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“Boston Market is in the home meal replacement category; it’s complementary,” he said. “As far as franchisees go, we think they will view this positively because it will provide some new site opportunities for conversions to McDonald’s. And down the road, it could provide some additional franchise opportunity under the Boston Market brand.”

CKE bought the rights to franchise Boston Market, formerly known as Boston Chicken, in 1994. But a year later, the company acknowledged that it bit off more than it could chew and turned over Southern California franchise rights to Boston West LLC, a then-new company owned largely by Boston Chicken.

Anaheim-based Boston West filed for bankruptcy reorganization in November 1998, a month after Boston Chicken did so. CKE currently owns 11% of Boston West.

A reorganization plan filed last month with U.S. Bankruptcy Court in Santa Ana proposes that Boston Chicken take over 75% ownership of the company, with CKE increasing its ownership to 25%.

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“We had hoped to have the plan approved, and we’re going to maintain status quo until we hear otherwise,” Wilson said.

The plan also calls for three of the current Southern California Boston Market locations to be converted to Carl’s Jr. restaurants. CKE took over operations of the area Boston Markets when Boston West filed for bankruptcy.

McDonald’s has 123 restaurants in Orange County; Boston Market has 13.

McDonald’s, based in Oak Brook, Ill., is the world’s largest restaurant company, with 25,000 locations and 284,000 employees. It earned $1.55 billion last year on sales of $12.4 billion.

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On Wednesday, its stock closed at $46.02, up 26 cents in New York Stock Exchange trading.

For Boston Market, the sale will become one of the final chapters in what once was one of the biggest success stories of the 1990s. The company was one of the fastest-growing and hottest stocks on Wall Street six years ago. Its shares more than doubled on their first day of trading in November 1993 and peaked at $38.75 three years later.

But Boston Market filed for Chapter 11 bankruptcy protection in October 1998 as it ran out of cash to pay creditors and supermarkets started selling cheaper versions of its rotisserie chicken and other foods to eat at home.

The company lost $223.9 million on sales of $462.4 million in 1997, the last full year it reported such figures. Its stock fell 24 1/2 cents Wednesday, to 16 cents a share, in over-the-counter trading.

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J. Michael Jenkins, chief executive of Boston Chicken, said in a statement Wednesday that the company is “very encouraged to have such a strong buyer.”

Boston Chicken plans to file a reorganization plan in December and complete the sale to McDonald’s in the middle of next year. It had previously said its more than $900 million in debt and its stock would be canceled under a reorganization plan.

Bloomberg News contributed to this report.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

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Two Chains at a Glance

McDonald’s Corp. is buying most of the bankrupt Boston Market restaurant chain for $173.5 million. Here’s a look at the two companies.

Name: McDonald’s Corp.

Headquarters: Oak Brook, Ill.

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Operations: 25,000 restaurants worldwide

Employees: 284,000

Net income (millions):

1994: 1,224.4

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1995: 1,427.3

1996: 1,572.6

1997: 1,642.5

1998: 1,550.0

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Revenues (millions):

1994 8,320.8

1995 9,794.5

1996 10,686.5

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1997 11,408.8

1998 12,421.4

Stock price: $46.02, up 26 cents

***

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Name: Boston Chicken Inc.

Headquarters: Colorado Springs, Colo.

Operations: 869 restaurants in U.S.

Employees: 12,470

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Net income (millions):

1994: 16.1

1995: 33.5

1996: 66.9

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1997: -223.9

1998: n/a*

Revenues (millions):

1994: 96.1

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1995: 159.5

1996: 264.5

1997: 462.4

1998: n/a*

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Stock price: 16 cents, down 2 cents

* Filed for bankruptcy in October 1998, did not report year-end results.

Source: Bloomberg News


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