Deal Will Put 28 Rally’s Under Control of CKE

CKE Restaurants Inc. has agreed to take over 28 Rally’s Hamburgers Inc. locations in California and Arizona and operate most of them as Carl’s Jr. units, the companies said Wednesday.

The deal would let the 660-unit Carl’s Jr. expand its presence in California by quickly adding new locations and help Louisville, Ky.-based Rally’s eliminate costs associated with the far-flung group of restaurants.

“The closest company-operated units we have are in St. Louis, and we weren’t making any money on the restaurants in California and Arizona,” said Donald Doyle, Rally’s president and chief executive. “This should make for a real positive swing in cash flow for us, and it should work out well for Carl’s Jr.”

The deal calls for Rally’s, which operates 250 company-owned units in Eastern states, to turn over operation of the 28 restaurants to Carl’s Jr. in return for a percentage of gross revenue. Rally’s will continue to own the restaurants.

Rally’s has several company-owned restaurants in Los Angeles and Orange counties. The deal will not affect 23 Rally’s restaurants operated by franchisees, CKE said, including a handful in Orange County,

Rally’s outlets near existing Carl’s Jr. stores won’t be converted. And CKE executives are still trying to determine what the converted Rally’s units will look like. Both restaurant chains offer fast-food menus, but the companies have dramatically different operations.

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Rally’s restaurants feature a simple, burger-based menu, two drive-through windows and no indoor seating. Carl’s Jr. restaurants have a larger menu--some have added Green Burrito brand Mexican-style fast food--large, indoor dining rooms and salad bars.

CKE might opt for a more-compact restaurant design akin to the new Carl’s Jr. Express restaurants that have been added at a handful of service station/convenience stores in Southern California. Those restaurants concentrate on take-out business and feature a somewhat limited menu.

CKE officials have not ruled out adding dining rooms to certain Rally’s properties. “This is all new and we’re still sorting things out,” a spokeswoman said.

The deal was driven by an April 29 agreement that ended CKE Chairman William P. Foley II’s hostile takeover bid of Giant Group Ltd., a Beverly Hills-based company that owns a controlling stake in Rally’s. As part of that deal, Foley and CKE agreed to take a 20% interest in Rally’s.

At that time, Carl’s Jr. and Rally’s executives indicated that they would look for ways to lower operating costs at the chains.

The settlement ended what initially had been a fierce battle between Foley and Giant Group Chairman Burt Sugarman. The two executives had traded lawsuits and Foley had threatened to conduct a proxy fight to gain control over Giant and Rally’s.

For Doyle, the deal reestablishes ties with Carl’s Jr. Doyle served as president of Carl’s Jr. for a short time during the early 1990s, but left the company after butting heads with founder Carl N. Karcher over the chain’s direction.