Quality Dining Inc. shareholders seek to privatize company

Nation's Restaurant News, June 28, 2004 by Amy Garber

MISHAWAKA, IND. -- As the distressed Burger King system begins to see sales momentum from aggressive couponing and other initiatives, one of the chain's few remaining publicly held franchisees took steps that could lead to removing itself from Wall Street's spotlight.

Quality Dining Inc., based here, said five shareholders led by its chief executive, Daniel Fitzpatrick, have proposed taking the company private with an offer to pay $2.75 a share for all outstanding QDI common stock, or an estimated $17.3 million for the shares not already held by the group.

In addition to the 118 Burger King units in its portfolio, Quality Dining franchises 38 Chili's Grill & Bar locations and owns eight Grady's American Grill units, six Papa Vino's Italian Kitchen restaurants, three Spageddies Italian Kitchen stores as well as one Porterhouse Steak and Seafood restaurant.

Fitzpatrick, a veteran restaurant executive who also is vice chairman of BK's National Franchisee Association, in a letter to Quality Dining's board of directors said his group is looking to relieve the company "of the burdens of being a public corporation."

He added, "The company's stock suffers from minimal public float and trading volume, a lack of research by analysts and the negative perception associated with being a restaurant franchisee."

When the Fitzpatrick group's offer was publicly disclosed on June 16, Quality Dining's stock closed at $2.75 a share, up nearly 19.6 percent for the day. Previously, shares had been trading near the 52-week low of $2.15. The 52-week high is $3.25.

The company posted a 2.4-percent increase in comparable-restaurant sales at its BK units for the second quarter ended May 9. Same-store sales at QDI's Chili's units fell 0.5 percent for the quarter.

QDI attributed the positive results at its BK units to the chain's introduction of "some appealing new products" and "improved promotional campaigns."

Similarly, Miami-based Burger King Corp., after years of depressed sales, posted a 7.5-percent gain in U.S. same-store sales in May--its highest monthly gain since 1999. The May results also marked BK's fourth consecutive month of positive same-store sales, which officials said have been driven by new premium products, better advertisements and improved operations.

In addition, long-beleaguered franchisees insisted that BK's aggressive direct-mail promotion helped boost sales in recent weeks. The nation's No. 2 restaurant chain partnered with Valpak to send coupons to more than 40 million homes between April 28 and June 1. Most of the envelopes contained a 12-page booklet filled with Burger King coupons that ranged from buy-one-get-one-free offers on Whoppers and the new premium TenderCrisp chicken sandwich to 50-percent-off deals for premium salads with the purchase of sodas.

But the recent sales relief didn't come in time for some franchisees, such as AmeriKing--formerly the chain's largest operator, with more than 320 stores in its heyday--which failed to emerge from bankruptcy last year.

Besides Quality Dining, Burger King's only other public franchisee is Syracuse, N.Y.-based Carrols Corp., which now is the chain's largest operator, with 351 BK stores.

In April Carrols said certain provisions in some sale-leaseback transactions had necessitated the restatement of its financial results for 2003, lowering net earnings by nearly 41 percent from the originally stated figure. However, the revision will raise earnings before interest, taxes, depreciation and amortization, according to Carrols, which also operates Pollo Tropical and Taco Cabana restaurants. The company declined to specify the nature of the provisions that prompted the restatement.

As for the Fitzpatrick group's proposal for Quality Dining, its purchase would take the form of a merger in which the company would then go private.

"The proposal represents a 23-percent premium over the closing price of the common stock on June 14, 2004, and, as such, offers the company's shareholders full and fair value," Fitzpatrick wrote in his letter. "It is our present intention, following the merger, to maintain the status of the company as an independent, multiconcept restaurant operator."

Including stock options, Fitzpatrick's group controls 45.7 percent of Quality Dining's 11.6 million outstanding shares. The bidders had advised the company that they were not interested in selling their stock to a third party. One member of the group is Ezra Friedlander, one of the founders of Quality Dining who sits on the company's board of directors and also is now a judge on the Indiana Court of Appeals. The others are Quality Dining executives including Gerald Fitzpatrick, senior vice president, Burger King division; James Fitzpatrick, senior vice president and chief development officer; and John Firth, executive vice president, general counsel and secretary.

Fitzpatrick, in his letter, said the proposal would allow "management to focus on the implementation of important strategic goals without having also to address the burdens and costs of being a public company. These costs have significantly increased with the passage of the Sarbanes-Oxley Act and the related regulations promulgated by the Securities and Exchange Commission and Nasdaq, and, in fact, compliance will become even more expensive and burdensome with the approaching phase-in of new rules relating to internal control procedures."