Apple South to buy DF&R Restaurants

Nation's Restaurant News, August 28, 1995 by Don Ruggless

MADISON, Ga. -- Apple South Inc. here agreed to acquire DF&R Restaurants of Texas, operator of the 39-unit Don Pablo's Tex-Mex concept, in a $208 million deal that would add further diversity to Apple South's portfolio of restaurants.

The proposed stock swap, expected to close in December following shareholder approval, would leave DF&R as a subsidiary of Apple South -- the largest franchisee of Applebee's International Inc. -- and yield a company with combined annual sales of more than $358 million.

Erich Booth, chief financial officer of Apple South, said the company had been looking for a year for a Tex-Mex, Southwestern or steakrib concept to complement its stable of 170 Applebee's American-style restaurants, 10 Tomato Rumba's Pastaria Grills, eight Gianni's Little Italy units and 10 Hardee's concepts.

The acquisition of a Tex-Mex concept allows the company more development options, Booth said, adding, "We see a tremendous opportunity of maybe putting two or even three concepts together in a row on the same plot of land."

David Frazier, chairman of DF&R in Bedford, Texas, said: "Diversity is the word. It's no longer that wise to keep all your eggs in one basket. You need to have several baskets just in case some elephant comes along and stomps one of them. You still have some others with eggs in them.

"I'll gladly give up some of my control for some diversity," he explained. "We put our ego aside and decided from a strategic point of view this was a wise move. It gives us diversity that we didn't have. We were solely dependent on Don Pablo's in Texas, the Midwest and the Mid-Atlantic. We had nothing to fall back on."

DF&R also owns 12 Harrigans Grill and Bar restaurants but has added none since 1991, focusing instead on the Don Pablo's concept.

"Don Pablo's is a proven concept, successful in multiple markets and with a strong management team and potential for growth," Booth said. In the year ended May 31, DF&R reported earnings of $6.7 million on sales of $91.6 million. In a similar 12-month period, Apple South reported earnings of $16.2 million on sales of $167.2 million.

The proposed deal puts Apple South "into a whole other league," said Craig Weichmann, an analyst with Morgan Keegan & Co. in Memphis, Tenn. "They're now a $350 million operator."

Store-level margins are comparable for both companies, Weichmann said.

In addition, Don Pablo's gives Apple South a company-owned growth vehicle. "Although they had some promising results with Tomato Rumba's Pastaria Grill, it was going to be three to four years before that would be additive to earnings," he added.

Apple South acquired two Gianni's Little Italy units in Florida in December 1992. "We used those as a spring-board for developing an Italian concept," Booth noted. The company has been working on broadening the menu with grilled items and lightening the atmosphere as it converts existing Gianni's units to the newer 188-seat Tomato Rumba's concept. It expects to have all the Gianni's units converted by the end of this year.

By adding a Tex-Mex concept to its portfolio, Apple South is borrowing a page from the playbook of Applebee's International of Kansas City, Mo., which last year bought Atlanta-based Rio Bravo Cantina.

The two concepts, which have yet to compete head-to-head in any market, differ, Booth said. "Don Pablo's seems to be much more of a family atmosphere than a Rio," he added. "Rio tends to be a little more yuppie."

DF&R will operate as a wholly owned division of Apple South and maintain its headquarters in the Dallas-Fort Worth suburb of Bedford.

"We are very much on a divisionalized basis right now," Booth explained. "Applebee's has its own operations, its own marketing, training and recruiting. Tomato Rumba's has the same thing. DF&R will operate as a separate division."

Frazier pointed out that this was important in the deal. "This is a Texas-based company and should remain so," he said, adding that Thomas E. duPree Jr., chief executive of Apple South, agreed. "A company that has a Tex-Mex concept as its main growth vehicle dang well should be headquartered in Texas. We were assured more than once that there would be no layoffs, and the company won't move to Georgia."

Both executives said the development strategy for the two companies would remain as announced through 1996. Apple South plans to open 40 Applebee's and 10 Tomato Rumba's. DF&R plans to open 18 Don Pablo's.

As for the Harrigan's concept, Booth said it has "good operations, good sales, good margins, but DF&R has been focusing on Don Pablo's. We agree with that in the short run."

Booth also said Apple South liked DF&R's culture. "They run their restaurants well, and they are very focused on the customer. Those are characteristics that we hold dear."

Frazier agreed, saying: "They've taken a franchise and made it sing like a soprano. What they've lacked is a concept to go nationwide without a franchise. This will speed up the learning curve."

The proposed acquisition calls for an exchange of stock in the two companies in December, and the exchange ratio depends on the share price of Apple South common shares at the time of closing. Each share of DF&R stock would be swapped for 1.5 shares of Apple South common stock if the market price of Apple South shares is between $18 and $26. If the pershare market price for Apple South shares is equal to or below $18, the exchange rate would rise to 1.55 shares.