Shoney’s acquires TPI in stock swap

Shoney’s acquires TPI in stock swap – TPI Enterprises Inc

Bill Carlino

NASHVILLE, Tenn. — In a deal that had been rumored on Wall Street for several years, Shoney’s Inc. agreed to acquire TPI Enterprises Inc. — its largest franchisee — in a stock swap valued at $65 million.

Under the terms of the pact, Shoney’s Inc. — which operates and franchises some 930 units of Shoney’s family restaurants and 640 sites of Captain D’s, a fried seafood concept — will tender 0.28 shares of its common stock for each outstanding share of TPI and one warrant for every 3.125 TPI shares outstanding. Shoney’s also will assume about $95 million in TPI debt.

The West Palm Beach, Fla.-based TPI operates 188 Shoney’s units and 69 Captain D’s locations. The merger boosts the percentage of corporate-run Shoney’s and Captain D’s units to more than 60 percent of each system.

For nearly four years the possibility of a merger between Shoney’s and TPI had been discussed in analysts’ reports and industry circles.

“This was something that had been talked about on and off for a while but for whatever reasons never came off,” said Barry Stouffer, who tracks Shoney’s Inc. for the Nashville-based firm of J.C. Bradford & Co. “TPI hasn’t been doing well, and Shoney’s certainly got it for a good price. But Shoney’s has problems of its own, and taking on more restaurants makes its planned turnaround effort more difficult. But if Shoney’s can pull it off, there’s tremendous upside potential.”

The acquisition caps a dizzying series of events that have impacted Shoney’s over the past eight months, including instituting a top-level executive purge, the hiring of new chairman and chief executive C. Stephen Lynn, and the undertaking of a comprehensive restructuring program to boost lagging sales and declining operations.

For its latest 12 months ended July 9, TPI reported a loss of $7.1 million, while same-store sales at its Shoney’s division were down 4.4 percent.

Shoney’s said the TPI acquisition would depress its fiscal 1996 earnings.

In a statement Lynn said the merger is “another step in the company’s ongoing commitment toward a more focused strategy.”

Meanwhile, Shoney’s revitalization efforts under Lynn’s auspices include unit remodeling, sale of noncore restaurant concepts and comprehensive employee training programs in order to resuscitate a concept that has been competitively squeezed in recent years by value-oriented quick-service chains and more vibrant casual operators.

Through the first half of the year, Shoney’s Inc. reported a 46-percent plunge in profits, to $19 million, from the year-ago mark. Same-store sales for the Shoney’s division have been down between 2 percent and 3 percent from the prior-year level.

Last January, under heavy pressure from investors and franchisees, Shoney’s Inc. jettisoned several top-level executives in a corporate housecleaning, including company president James Arnett and Shoney’s division president Jim Grout. In addition, chairman Taylor Henry Jr. submitted his resignation.

The company subsequently refocused its strategy on its flagship Shoney’s and Captain D’s divisions and proceeded to place its 300-unit Lee’s Famous Recipe Chicken chain and Mike Rose Foods manufacturing arm on the sale block.

After a four-month search, Lynn was lured away from his post as chairman of Oklahoma City-based Sonic Corp., where he had guided one of the more impressive industry turnarounds in recent years.

Shoney’s has since signed agreements to sell Lee’s to Atlanta-based RTM Restaurant Group and Mike Rose Foods to Levmark, an Atlanta-based equity and acquisitions firm. The proceeds will be used to fund the systemwide remodeling program.

Its 30-unit casual-theme portfolio of Pargo’s, Fifth Quarter Steakhouse and Barbwire’s, originally slated to be divested along with Lee’s and Mike Rose Foods, was instead folded into a new casual-dining division.

Shoney’s executives said a decision has not been made regarding the new management structure following the merger.

“There are a lot of decisions we have to consider, and we want to get to them as quickly as possible,” said W. Craig Barber, chief financial officer of Shoney’s Inc. “It’s up to Steve to decide how we arrange the management.”

Ironically, TPI president and chief executive Gary Sharp, who once served as Shoney’s division president, convinced Arnett, a 24-year veteran of Shoney’s Inc., to join TPI as president of its Shoney’s arm in July.

Barber said that in addition to the ongoing store-level improvements at Shoney’s Inc., nicknamed the “quickstart” program, the Shoney’s division will initiate a 40-store test of a partner-manager program, a strategy Lynn used successfully at Sonic, following the end of fiscal 1995 in October.

On marketing fronts, Shoney’s said it would resurrect a double-decker burger after an 11-year hiatus, and it recently kicked off a new advertising campaign carrying the tag line “Classic American Food.”

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