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Rally's, Checkers End Their Merger Talks

Restaurants: Deal was championed by CKE chairman, who hopes to build national chain around Carl's Jr.


Deal maker William P. Foley II's fast-track plan to build a national restaurant company around his Carl's Jr. chain hit a speed bump on Monday when Rally's Hamburgers Inc. and Checkers Drive-In Restaurants Inc. abandoned a planned merger.

The two companies dropped their previously announced plans after determining that the Securities and Exchange Commission intended to subject the deal to accounting methods that would cause "financial problems," the companies said.

"It was aborted because the earnings benefit we would have gained from doing the transaction would have been offset . . . by the accounting treatment that the SEC was leaning toward," said Donald E. Doyle, president and chief executive of Louisville, Ky.-based Rally's.

The deal had been championed by Foley, chairman and chief executive of Anaheim-based CKE Restaurants Inc., operator of the Carl's Jr. chain. CKE also has an equity position in Rally's and Checkers.

"I wouldn't say this is a setback," Foley said. "Both [Rally's and Checkers] are making headway, and they'll both continue to make gains as independent companies," Foley said. "So this is something we can revisit in the future if we want to."

Restaurant industry analysts said the failed merger should have only a minor impact on CKE's expansion plans.

The Anaheim chain's planned acquisition of Hardee's Food Systems Inc., which has 3,152 locations in the East, is a more ambitious undertaking for CKE, which operates 678 Carl's Jr. restaurants in Western states.

"The real issue for CKE long-term is its deal with" Hardee's, said Mark Sheridan, a New Orleans-based analyst with Johnson Rice & Co. "That's where Carl's Jr. has its huge opportunity to expand."

Checkers' merger with Rally's would have created a company with $327.8 million in revenue and 849 drive-through burger restaurants in the East and South.

Both chains have been struggling to turn a profit but have made gains in recent quarters after CKE executives began working on their operations.

Clearwater, Fla.-based Checkers said that Foley, who already serves as chairman of CKE and Irvine-based Fidelity National Financial Inc., has been named chairman.

Previously, CKE acquired a 10% stake in Checkers, along with $35.8 million in Checkers' debt. CKE also holds stock warrants that, if exercised, would boost its ownership stake to 22%.

Rally's shares fell 25 cents to close at $2.625 on Nasdaq, while Checkers added 6.25 cents to close at $1.19, also on Nasdaq. CKE gained 12.5 cents to close at $27.875 on the New York Stock Exchange.

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