Foodmaker, the San Diego-based parent of Jack in the Box, on Monday agreed to buy Chi Chi's, a Louisville, Ky.-based Mexican restaurant chain, for $230 million.
Chi Chi's operates 200 dinner restaurants in the East and Midwest. The Jack in the Box chain includes 897 franchise and company-owned fast-food restaurants, largely in the West and Southwest.
The two chains will operate as separate divisions, according to Foodmaker Vice President Charles W. Duddles. Chi Chi's existing management team, including Chairman Hal Smith, is expected to manage the dinner house chain from Louisville, he said.
There are no Chi Chi's restaurants in California, but the chain's name might be recognized by Midwesterners and Easterners who have relocated to California during recent years.
FOR THE RECORD
Los Angeles Times Wednesday February 24, 1988 Home Edition Business Part 4 Page 2 Column 3 Financial Desk 1 inches; 31 words Type of Material: Correction
A chart in Tuesday's editions comparing financial statistics for Foodmaker and Chi Chi's contained incorrect information about Chi Chi's reporting period. The information was for the six months ended Oct. 31, 1987.
The chain did venture into California in 1983, when a Chi Chi's franchisee opened a restaurant in San Diego. That restaurant closed its doors in 1985, and plans to expand in California were dropped.
Duddles would not comment on Foodmaker's plans to expand Chi Chi's in the West.
The proposed acquisition surprised some restaurant industry analysts because Foodmaker still carries $251 million in debt from 1985 when the company was bought from St. Louis-based Ralston Purina.
"Comfortable" With Debt
The deal, to be completed by April 1, would "significantly increase their debt load," according to Jay H. Freedman, a New York-based restaurant industry analyst with Kidder, Peabody & Co.
However, Chi Chi's would give Foodmaker "another leg outside of the fast-food business, which should help to stabilize Foodmaker's earnings," Freedman said.
Foodmaker believes that it can pay down debt generated by the Chi Chi's acquisition through the 200-unit restaurant chain's existing cash flow, according to Duddles, who is "comfortable" with an increased debt load.
Foodmaker's future debt load will be "less, in terms of a debt-to-equity ratio, than what we had right after" the 1985 buyout, Duddles said. Foodmaker had $381.1 million in long-term debt at the time.
Industry observers were somewhat surprised that Foodmaker, which operates only fast-food restaurants, wanted to acquire Chi Chi's, which operates only sit-down dinner restaurants.
Deal Seems "Very Odd"
However, Duddles said several Foodmaker executives, including Chairman Jack W. Goodall Jr., gained dinner house chain management experience during their careers at Ralston Purina, which owned a dinner house chain that was sold in a 1986 buyout to San Diego-based Paragon Restaurant Group.
The deal "struck me as very odd," said Tom Strenk, editor of Restaurant Business, a New York-based trade magazine. "Pillsbury owns Burger King and a few dinner houses, but that's under widely separated divisions."
Foodmaker reported a $13.9-million net profit and $598 million in sales for the year ended Sept. 27, 1987. Chi Chi's reported a $6.7-million net profit and $144.5 million in sales for the six months ended Oct. 31, 1987.
Chi Chi's has rejected buyout offers in the past. And after the stock market crash in October, Chi Chi's board agreed to buy back 2.5 million shares of the company's stock.
Foodmaker data for year ending Sept. 27, 1987; Chi Chi's data for year ending Oct. 31, 1987. Figures in thousands.
Foodmaker Chi Chi's Total system sales $655,104 $198,200 Total revenue 598,258 144,500 Net earnings 13,860 6,700 Total assets 470,450 215,300 Shareholder equity 117,564 92,300 Restaurants 897 185 Company-operated 639 119 Franchise-operated 258 66