A fast-growing New York ice cream company said Wednesday that it was buying troubled Swensen's Inc. in a merger that will create the nation's second-largest operator of ice cream parlors.
Steve's Homemade Ice Cream, which operates nearly 100 ice cream parlors in the East, is buying Phoenix-based Swensen's for stock and warrants valued at $9 million based on Wednesday's share prices. Swensen's operates 340 ice cream parlors, mostly in the West, with 135 parlors in California alone.
The deal marks the second time in less than a year that money-losing Swensen's has agreed to sell itself. Last October, it agreed to merge with Hobson's International, a small Santa Barbara ice cream outfit, but the deal fell through last December.
"Swensen's had been shopped around for some time," said Carol Kirby, marketing vice president at Glendale-based Baskin Robbins, which operates 3,200 ice cream parlors. "The problem was when you are buying a company with no production capability, you are essentially buying store leases."
Kirby said that Swensen's locations were "spotty. Some were good and some bad." She said she did not think the merger between Swensen's and Steve's would have much effect on Baskin-Robbins.
The deal gives Karl Eller, the largest shareholder of Swensen's, a 20% interest in Steve's, making him its third-largest shareholder with about 2.1 million shares. Richard Smith, Steve's chairman and chief executive, and Andal Corp., a metal fabricator and parking lot operator, own about 2.3 million shares apiece.
Smith was in Phoenix and couldn't be reached for comment Wednesday, and Swensen executives were unavailable. Jerry Tucci, an executive vice president at Steve's in Lindhurst, N.Y., said the company plans to keep the Swensen's name and expand the chain eastward.
"Steve's and Swensen's are really two separate concepts and probably have different customers," explained Tucci. "Swensen's serves ice cream, but it also serves food. Steve's serves just ice cream, and it's different from Swensen's."
Swensen's has lost money in each of the past four years. In 1986, it lost $1.17 million on sales of $9.35 million.
Steve's earned $270,915 on sales of $11.84 million last year, but Wednesday reported a $243,861 first-quarter loss on sales of $3.76 million. Steve's also said it expects to lose money in the second quarter, because of increased advertising and marketing costs.
The merger comes at a time when America's appetite for gourmet ice cream is growing. Ice cream parlor sales are expected to reach $1.7 billion this year, up from $1.2 billion in 1985, according to Find/SVP, a New York market research firm.
The deal, which involves no cash, is the latest in a string for Smith, the 44-year-old chairman and chief executive of Steve's Homemade Ice Cream and an almost legendary figure in the ice cream business. After buying Steve's from the New York investment firm, Integrated Resources, in December, 1985, he moved quickly to expand the parlor chain and introduce Steve's colorful pints in supermarkets around the country.
Smith got his start working for his father's ice cream company but later branched out on his own to start a small ice cream distributorship. Known as a shrewd deal maker, he acquired the Dolly Madison trademark when that firm was in bankruptcy in 1974 and built it into the second-best-selling brand in the New York area, behind Kraft's Breyers.
In 1979, he invented Frusen Gladje, emulating the successful and foreign-sounding Haagen Dazs ice cream. He then sold Frusen Gladje's pint business to Kraft, keeping the 40 or so ice cream parlors and the right to market Frusen Gladje outside the United States.
In addition to Steve's, Smith continues to operate Dolly Madison. He also controls Calip Dairy, the largest distributor of ice cream in the New York metropolitan area.