The ambitious move by the parent company of Carl's Jr. to gobble up the much larger Hardee's fast-food chain caused some indigestion Monday on Wall Street.
CKE Restaurants Inc., which has been on a buying spree, said Monday that it will acquire Hardee's Food Systems from its Montreal parent, Imasco Ltd., for $327 million.
The much-anticipated deal would make CKE one of the top players in the burger wars. Hardee's, though shutting eateries, still has 3,150 restaurants in 40 states compared with 675 Carl's Jr. sites mainly in California.
"This is a strong marriage of two well-known brands with a combined 90 years' experience in the restaurant business," William P. Foley II, CKE's chairman, said in a statement.
Investors, though, seemed nervous about short-term prospects for turning around Hardee's.
CKE stock dropped $1.125 a share--or 5.5%--in heavy New York Stock Exchange trading Monday to close at $19.50 a share.
"It's a small chain swallowing up a larger chain, and that's a lot to swallow even if the larger chain is strong," said consultant Bob Sandelman of Sandelman & Associates in Brea.
Under the terms, CKE would pay $277 million in cash, financed by a bank loan and a $100-million secondary stock offering, and issue Imasco $50 million in convertible debt securities.
On the surface, it seems like such a big risk for Wall Street because of the relative sizes of the companies and the depth of Hardee's problems, said analyst Andrew M. Barish at Robert Stephens in San Francisco.
But Barish, Sandelman and other analysts said they have confidence that the management team led by Foley eventually will succeed with its aggressive plan to cut costs at somewhat bloated Hardee's.
Even Hardee's largest franchisee, Flagstar Cos. in Spartanburg, S.C., welcomed the acquisition as a "positive step."
"We are encouraged by this new development and view it as a positive step forward for our restaurants," Flagstar Chairman James B. Adamson said.
Flagstar, with 580 Hardee's stores, had filed an arbitration suit against Hardee's last month, claiming that the company had mismanaged the brand. Flagstar still plans to pursue that claim, its executives said.
Barish said he believes the deal will enhance CKE's earnings over the next year, Barish said.
Barish said that CKE plans to cut costs at Hardee's by 3%--about $20 million--in the first six months, a move that should put it back into the black by the end of the year.
A task force of CKE and Hardee's executives will cut Hardee's overhead, including its higher food costs, and trim a layer of its regional management, said Stephen McManus, Hardee's president.
McManus said the combined company also would sell some unprofitable Hardee's outlets to an outside partnership with the stipulation that they could buy them back at a later date.
McManus will continue as chief executive of the company. CKE executives would not comment on other management changes.
The deal is expected to close late this summer. Then CKE will begin combining the two chains' menus and its signs, starting in two test markets. CKE identified only one of those markets, Peoria, Ill., for now.
CKE will keep Hardee's popular breakfast items, which account for 30% of its business and will shed its lunch and dinner menu in favor of Carl's Jr.'s charbroiled burgers.
Industry observers say CKE's ability to pull off a turnaround hinges largely on the cooperation of Hardee's network of 2,364 franchisees.
These franchisees would have to foot the bill for costly store remodels and new charbroilers to prepare the Carl's Jr. menu. CKE executives say they plan to give franchisees incentives to switch.
"We want to lead by example [with the company stores]," said Loren Pannier, senior vice president. "We want to show them it can work,"
Considering Carl's Jr's performance in the last two years, analysts think the change of leadership will be welcomed. "Hardee's franchisees are looking for changes to the concept and somebody to bail them out," said restaurant consultant Janet Lowder of Rancho Palos Verdes.
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Chains at a Glance
CKE RESTAURANTS INC.
* Headquarters: Anaheim
* Business: Operates Carl's Jr., Rally's, Checkers, Taco Bueno, JB's Restaurants, HomeTown Buffet and Galaxy Diner restaurants
* Total restaurants: 1,000
* Employees: 11,000
* Chairman/CEO: William P. Foley II
* 1996 sales: $537 million
* 1996 net income: $22.3 million
HARDEE'S FOOD SYSTEMS INC.
* Headquarters: Rocky Mount, N.C.
* Business: Operates Hardee's fast-food hamburger chain
* Total restaurants: 3,150
* Ownership: Imasco Ltd., a Canadian conglomerate. Largest franchisee is Flagstar Cos., which operates 580 stores.
* 1996 sales: $3 billion
* 1996 operating loss: $17.8 million
Source: Bloomberg News, Dow Jones, Hardee's