DavCo chief heads group buyout offer $18-to-$20-a-share proposal sends stock $4.50 higher

Waking up a laggard

Wendy's franchisee now also operates 34 Friendly's

Fast food

September 06, 1997|By Sean Somerville | Sean Somerville,SUN STAFF

A group led by the chairman of DavCo Restaurants Inc. has proposed buying the Crofton-based operator of Wendy's and Friendly's restaurants for between $18 and $20 a share -- a premium of more than 34 percent to shareholders -- the company said yesterday.

The investment group, headed by Chairman and CEO Ronald D. Kirstien, includes Executive Vice President Harvey Rothstein and Citicorp Venture Capital Ltd., which financed a leverage buyout of DavCo a decade ago. Citicorp Venture Capital owns about 3.1 million shares, or about 48 percent, of DavCo's roughly 6.4 million outstanding shares. The management team owns about 500,000 shares.

David J. Norman, a DavCo spokesman, said the move is a response to an investment community that has been cool to DavCo's stock.

Shares of the company were first offered publicly in August 1993, opening at $11.75. More than four years later, DavCo shares closed Thursday at $13.375.

That's a 14 percent return over four years, dismal compared with the Dow Jones industrial average's gain of 120 percent in the same period.

"Traditionally, DavCo stock has underperformed," Norman said. "We feel that the market is not providing value to our shareholders."

He said the board of the company has not yet received a formal offer. Announcement of the potential deal boosted shares of DavCo by $4.50, to close at $17.875, a 52-week high.

Mark Hamstra, associate editor at Nation's Restaurant News, a New York-based trade publication, said the move is "not that surprising" in that management teams occasionally try to take their fast-food franchises private. He said such deals usually occur with companies that are struggling. "That's not the case with DavCo," Hamstra said.

Still, fast-food restaurants are stuck in a fierce fight against one another. Americans are spending more than ever on food prepared outside the home. But more companies -- from grocery stores to pizza parlors to chicken joints -- are fighting for their business.

Richard Papiernik, financial editor for Nation's Restaurant News, said DavCo's proposed deal is a recognition of tough times on Wall Street for restaurant stocks.

Just yesterday, shares of Wendy's International Inc. fell $1.625 to $22 after Bear Stearns downgraded shares from buy to neutral.

"Unless you're a premier performer, the market money is hard to come by," Papiernik said.

He said other fast-food businesses are merging and cutting jobs to improve their bottom lines.

Started in 1969 by two brothers from Chattanooga, Tenn., DavCo was part of the same chain that owned Po' Folks restaurants. It opened its first Wendy's restaurants in 1976 and gradually grew into a franchise that now owns 229 Wendy's restaurants and has 8,500 employees in Maryland, Virginia, the District of Columbia, St. Louis, central Illinois and Nashville, Tenn. In the Baltimore-Washington area, the company operates 138 restaurants.

Kirstien, a veteran of Baltimore Colts Hall of Famer Gino Marchetti's Gino's Restaurants Inc., joined DavCo in 1980. In 1987, management bought the company in a leveraged buyout financed primarily by Citicorp -- a move that saddled it with a heavy debt burden. In September 1993, after a recapitalization, the company raised $32 million in an initial public offering and was able to reduce debt and grow more quickly. Sales more than doubled to $208 million by 1995, but in 1996, the company said, same-store sales fell nearly 4 percent due to snowstorms and price-cutting by competitors.

This year, sales have rebounded, in part because of Wendy's introduction of a pita sandwich, with same-store sales up 4.4 percent and revenue of $163.2 million for the 39 weeks ended June 28. Earnings, too, are up -- by 50 percent -- to $4.7 million for the same period.

In July, DavCo became the first franchisee of Friendly's restaurants, signing a long-term agreement that gave it 34 existing restaurants in the mid-Atlantic region and the exclusive rights to develop up to 100 more in the next six years. It has committed to building at least 74.

Pub Date: 9/06/97

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