McDonald’s to Diversify With Acquisition of Boston Market

Taking its growth-by-acquisition strategy to a new level, hamburger giant McDonald’s Corp. said Wednesday that it will buy most of the Boston Market restaurant chain from its bankrupt parent for $173.5 million. The proposed deal marks McDonald’s first purchase of a national chain and expands on its plan to diversify beyond its staple burger business.

McDonald’s Golden Restaurant Operations Inc. unit would pay cash and assume an undisclosed amount of liabilities for 751 Boston Market restaurants owned by Golden, Colo.-based Boston Chicken Inc., rights to an additional 108 franchise locations and the brand name.

The acquisition would help spur McDonald’s growth in the U.S., which has been relatively stagnant in recent years, and prevent it from further saturating the market with its own restaurants, analysts said. McDonald’s said it will keep an unspecified number of locations as Boston Markets and switch others to its burger restaurants, as well as the newer Chipotle Mexican Grill and Donatos Pizza chains. McDonald’s bought the 150-unit Donatos chain in the Midwest in May and a stake in the 40-unit, Denver-based Chipotle in 1998.

Analysts said the Boston Market deal is a winner for the real estate alone.

“They’re getting a very good deal for not much more than the value of the land,” said analyst Paul Westra at Credit Suisse First Boston, who rates McDonald’s “strong buy.”

Investors apparently like the proposed buyout, as McDonald’s shares rose 27 cents to close at $46.02 in New York Stock Exchange trading.

Among other things, the deal would make for some strange bedfellows. Longtime McDonald’s competitor CKE Restaurants Inc., the Anaheim-based owner of the Carl’s Jr. burger chain, operates 56 Boston Market restaurants in Southern California and at one time had franchise rights to build 300 stores in Southern California and Sacramento.

CKE executive Robert Wilson said he doesn’t yet know what the McDonald’s deal will mean to the franchises that CKE has an interest in and operates.

“We’ll have to see what the future of the brand is in light of this announcement,” Wilson said. “I’m sure over the next several weeks it will play out and we’ll find out.”

Dick Adams, head of an association of McDonald’s franchisees that makes up about 10% of the chain, said the deal does not bode well for Boston Market’s future.

“They tried to be a dinner place; that didn’t work, so they went into the lunch business, which is in direct competition with McDonald’s,” he said. “They will remain in direct competition if they continue to focus on the lunch sandwich. I think [McDonald’s] will turn them into other restaurants, and the Boston Market chain will go away or become real small.”

McDonald’s spokesman Charles Ebeling said the company doesn’t view Boston Market as direct competition.

“Boston Market is in the home-meal replacement category; it’s complementary,” he said. “As far as franchisees go, we think they will view this positively because it will provide some new site opportunities for conversions to McDonald’s. And down the road, it could provide some additional franchise opportunity under the Boston Market brand.”

McDonald’s, based in Oak Brook, Ill., is the world’s largest restaurant company, with 25,000 locations and 284,000 employees. It earned $1.55 billion last year on sales of $12.4 billion.

For Boston Market, the sale would become one of the final chapters in what was once one of the 1990s’ biggest success stories. The company was one of the fastest-growing and hottest stocks six years ago. Its shares more than doubled on their first day of trading in November 1993 and peaked at $38.75 three years later.

But Boston Market filed for Chapter 11 bankruptcy protection in October 1998 as it ran out of cash to pay creditors and supermarkets started selling cheaper versions of its rotisserie chicken and other foods to eat at home.

The company lost $223.9 million on sales of $462.4 million in 1997, the last full year it reported such figures. Its stock fell 24.5 cents Wednesday to 16 cents a share in over-the-counter trading.

J. Michael Jenkins, chief executive of Boston Chicken, said in a statement Wednesday that the company is “very encouraged to have such a strong buyer.”

Boston Chicken plans to file a reorganization plan in December and complete the sale to McDonald’s in the middle of next year. It had previously said its more than $900 million in debt and its stock would be canceled under a reorganization plan.

*

Bloomberg News contributed to this report.