In an bid to buttress the financially troubled Naugles fast-food chain, Collins Foods International has tentatively agreed to transfer to Naugles some of its profitable Kentucky Fried Chicken franchises in exchange for a greater ownership interest.
Under the proposed $75-million agreement, Los Angeles-based Collins--which now owns about 50.1% of Naugles--would sell its 111 Kentucky Fried Chicken franchises in Southern California to Naugles.
In turn, Collins would get 23 million shares of newly created Naugles preferred stock, boosting its ownership interest in Naugles to about 92%.
The swap is subject to approval by Naugles shareholders.
Collins Foods also agreed to provide up to $3 million of credit to Naugles, which operates about 170 restaurants, to help meet working capital requirements.
"This combination brings together two restaurant concepts that potentially lend themselves to very similar operating procedures," James A. Collins, chief executive of Collins Foods, said in a prepared statement. "Both have take-out, sit-down and drive-through facilities in about the same size buildings. Food and labor costs are susceptible to being controlled in a similar fashion."
Analysts generally applauded Collins' move and predicted that the food service company will improve Naugles' operations.
Collins will continue to operate 142 Kentucky Fried Chicken franchises, 488 Sizzler restaurants, six food service distribution centers and Josephina's and Ginos restaurants.
"Collins has the management expertise to turn Naugles around," said Sarah Stack, an analyst with Bateman Eichler, Hill Richards in Los Angeles. "They are a well-managed company."
Rapid Start Falters
Michael G. Mueller, a restaurant industry analyst for Montgomery Securities in San Francisco, agreed. He said that although Mexican-American fast food is "somewhat different than fried chicken, the mechanics of operating the restaurants are similar. It shouldn't take them more than a year to get things back on track."
After a rapid start-up, Naugles has suffered recently in the competitive Mexican-American fastfood market dominated by Pepsico's Taco Bell.
Analysts say the chain has never had a clear image in the market.
Some blame Naugles founder Harold Butler, whose philosophy was to put money into restaurant operations rather than advertising.
Collins officials say they will abandon Butler's approach.
"He (Butler) didn't spend on advertising, but we plan to step up television advertising and do more in-store marketing and point-of-purchase promotion," said Christopher Thomas, chief financial officer for Collins.