Party! The Fiesta Is Set To Begin In May

by: Spin Doctor - April 26th, 2012   Add Comment
Taco Cabana restaurant in Dallas, Texas

It’s party time! Well…almost there as the board of directors of Carrols Restaurant Group (TAST) recently approved the spinoff of the Fiesta Restaurant Group. You may not realize this, but Carrols is the country’s largest Burger King franchisee and post-transaction the parent will retain its Burger King franchise business. The new company, Fiesta, will operate the company’s two quick-casual restaurant brands, Pollo Tropical and Taco Cabana. The spin is expected to be completed on May 7th, but the date of record for the transaction is actually today, April 26th. The new company will trade on the NASDAQ under the ticker FRGI and shareholders of Carrols will receive one share of Fiesta for every share of TAST owned.

While Burger King’s growth may have slowed a bit with the chain dropping to #3 in the US, Fiesta’s brands have been growing quite nicely with large increases in comp restaurant sales in 2011. As of its most recent filing, the company owned and operated 91 Pollo Tropicals and 158 Taco Cabanas including a bunch located in Central & South America. International expansion appears to be one of the company’s growth drivers and the company has agreements to develop franchises in Panama, Tobago, Aruba, Curacao, Bonaire and Costa Rica. While the company has franchised some Pollo Tropical restaurants, it is not actively doing so for Taco Cabana. For much more additional information on the company, check out its SEC filing here.

Carrols recently reported its year end numbers and also provided some guidance for 2012. Comparable restaurant sales are expected to be slightly higher at Pollo Tropical and Taco Cabana (4-6%) than at Burger King (3-5%). The company expects CapEx for Fiesta to be almost double that of the BK business, with Fiesta adding a net of 6-10 new restaurants. Commodity costs have been a problem in the past for the company and Burger King is expected to face increased pressure with commodity costs expected to rise 3-4% vs. 1-2% for Pollo Tropical and 2.5-3.5% for Taco Cabana.

This WSJ article discusses some of the challenges of franchisees, but Carrols obviously relishes its role and recently ‘doubled down’ on the strategy by purchasing an additional 278 franchises from the Burger King Corporation. Carrols will pay $15.8m and agreed to remodel 450 restaurants over the next 3.5 years. The deal is contingent upon the closing of the spinoff and BKC will also receive a 28.9% interest in the post-spin Carrols.

For some additional background information on the transaction, check out our earlier article on the subject.

Disclosure: Author holds no position in any stock mentioned.

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Long Live The Pollo?

by: Spin Doctor - March 7th, 2011  
Taco Cabana restaurant in Dallas, Texas

Image via Wikipedia

Maybe it’s not so good to be the king. While announcing its Q4 and FY 2010 earnings, Carrols Restaurant Group (TAST) announced plans to separate its Hispanic brands from its Burger King franchises (Q&A transcript here). The new company will operate the Pollo Tropical and Taco Cabana restaurants while Carrols will continue to run Burger King franchises, where, with over 300 hundred stores, it is the largest franchisee in the country. The spinoff is expected to be completed by the end of the year, but few other details have been released at this point.

Pollo Tropical and Taco Cabana had combined revenues of $439.1 million in 2010 and are really the ‘growth’ engine within Carrols. Comp restaurant sales for 2010 increased 7.4% at Pollo Tropical and 0.3% at Taco Cabana while Burger King witnessed a decline of 6.1%. Looking ahead, the trend is expected to continue next year at the Hispanic brands as the company projects 3-5% comp sales for Pollo Tropical and 1-2% for Taco Cabana. The forecast is a bit murkier for Burger King, but the company does expect improvement there. Part of the problem is that Burger King has been “negatively impacted by aggressive competition, discounting, harsh winter weather conditions, and higher beef costs.” While the winter will surely pass, beef costs and competition are unlikely to subside anytime soon.

The company believes the spin will allow for a greater focus on the BK franchises, which haven’t gotten as much attention recently. According to Paul Flanders, Carrols’ CFO, the company hasn’t been investing in Burger Kings “predominantly because as we allocate capital we’re getting higher rates of return on invested capital on the Hispanic brands. So we have been using the cash flow from Burger King not because we’re not bullish on the brand long term but simply it’s a capital allocation issue. I think as a separate business we believe that Burger King does in fact have opportunities to continue to grow and that we can leverage that as we go forward.”

The restaurant sector has seen some other transaction activity recently, notably when the Wendy’s/Arby’s Group (WEN) announced plans to sell off Arby’s in order to focus on the hamburgers at Wendy’s. Additionally,  Jack In The Box (JACK) could spin off Qdoba, a fast-growing Mexican chain burdened by a languishing burger chain.

Carrols currently has a market cap of only $175m so the two companies (especially the Hispanic brands) will be rather tiny. That creates some additional risk for investors and means the likelihood of ‘forced sellers’ is low. Jefferies owns a sizable piece of the company and it is always possible that it could take one of the companies private down the line. We will keep you updated as more information is released.

Disclosure: Author holds no position in any stock mentioned.

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