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Carrols to split BK from other brands

Operator looks to create two public companies through spinoff to shareholders

Carrols Restaurant Group Inc. plans to split its 305-unit Burger King operation from its 280-unit business operating and franchising Pollo Tropical and Taco Cabana in a tax-free spinoff to current shareholders.

The deal, pending approvals from the company’s board of directors and securities regulators, would close by the end of 2011, the company said in a statement Thursday.

The spun off company would own and operate 91 Pollo Tropical restaurants and 155 Taco Cabana locations, as well as franchise an additional 34 restaurants. The two chains had combined revenue of $439.1 million in 2010, the company said. Syracuse, N.Y.-based Carrols would continue to own and operate its more than 300 franchised Burger King locations, which booked revenue of $357.1 million in 2010.

The company also plans to refinance existing debt to separately finance the two entities.

Alan Vituli, Carrols chair and chief executive, described the split as a “natural evolution” for the company that would not impact day-to-day operations or result in workforce reductions.

“We believe that the separation will enable each company to better focus on its respective opportunities as well as to pursue its own distinct plan and growth strategy,” he said in a statement. “We also believe that a separation offers the potential for improving shareholder value as each publicly traded company will be better positioned to align its business with its respective shareholders’ objectives.”

Carrols has seen performance differ greatly between its owned brands and its franchised Burger King business during the most recent years. Pollo Tropical and Taco Cabana have boasted positive sales momentum while Burger King results have suffered from pricing problems including heavy discounting, the competition in the quick-service space and market-leading moves from rival McDonald’s.

For example, annual same-store sales rose 7.4 percent at Pollo Tropical and 0.3 percent at Taco Cabana but declined 4.3 percent at Burger King.

Vituli noted that new menu promotions and restaurant remodels have contributed to momentum at both Pollo Tropical and Taco Cabana.

As for Burger King, he noted that “aggressive competition, discounting, harsh winter weather conditions and higher beef costs,” hurt results.

Full results for the company’s fourth quarter ended Jan. 2, included net income of $2.6 million, or 12 cents per share, compared with $4.1 million, or 19 cents per share, in the prior year quarter, which included an extra operating week. Latest-quarter earnings included lease and impairment charges of $3.2 million, or 10 cents per share, as well as a favorable adjustment to the company’s tax provision of $0.6 million, or 3 cents per share, the company reported.

Fourth quarter revenue fell 7.1 percent $194.9 million. The company noted that revenue specifically for the Hispanic brands decreased 0.5 percent to $109.3 million.

Same-store sales rose 10.7 percent for the Pollo Tropical brand. For Taco Cabana, same-store sales increased 2.3 percent.

Fourth-quarter same-store sales at Burger King operation fell 6.1 percent.

Noting that Miami-based Burger King Corp. is under new ownership — it was purchased by 3G Capital in 2010 — Vituli expressed hope that the franchisor’s “back-to-basics approach to regain lost market share, with a focus on core products and less discounting activity,” will “help customers reconnect with the Burger King brand and favorably impact sales, margins and operating profits.”

Vituli added that the Burger King brand offers “considerable opportunity for growth through acquisition,” given Carrols’ “historical success in acquiring and integrating franchised restaurants” within the chain.

For the full fiscal year, net income totaled $11.9 million, or 55 cents per share, compared with $21.8 million, or $1.00 per share, in 2009. Both years included non-recurring gains and impairment and other lease charges that reduced earnings by 21 cents per share in 2010 and 6 cents per share in 2009.

Revenues for the year totaled $796.1 million, compared with $816.1 million in fiscal 2009.

Looking at 2011, Carrols estimated that same-store sales would increase between 3 percent and 5 percent at Pollo Tropical and between 1 percent and 2 percent at Taco Cabana.

The company said it had less visibility for its Burger King operations, but officials projected that same-store sales would improve from 2010 levels.

This year, Carrols expects to close 10 Burger King locations — one of which will be relocated — as well as one each of Pollo Tropical and Taco Cabana. The company plans to open between five and 10 new Hispanic brand restaurants during the year.

For the year, commodity costs are expected to increase between 2.5 percent and 3 percent for Hispanic Brands, and between 5 percent and 6 percent for its Burger King locations.

Contact Lisa Jennings at [email protected].

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