Pepsi Restaurants Like Kentucky Fried Chicken Taco Bell and Pizza Hut
PEPSICO TO ACQUIRE KENTUCKY FRIED
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July 25, 1986
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Pepsico Inc., long the No. 2 player in the soft drink business, yesterday said it would acquire the Kentucky Fried Chicken restaurant chain for $850 million, a move that would vault it into the No. 2 position in the fiercely contested fast-food industry as well.
The purchase of Kentucky Fried Chicken from RJR Nabisco Inc. would give Pepsico ownership of three of the nation's 10 largest restaurant chains. It already owns Pizza Hut and Taco Bell, both leaders in their categories, and with the addition of Kentucky Fried Chicken, by far the biggest of the chicken chains, Pepsico's restaurant operations would have systemwide sales of more than $7 billion.
The combined operations would push Pepsico past the Pillsbury Company's Burger King unit, which had sales of $4.3 billion last year, and leave it trailing only the ubiquitous McDonald's, which took in $11 billion in 1985. In terms of numbers of outlets, the combined Pepsico chains, with 14,000 restaurants, would exceed McDonald's, which has 9,000.
The acquisition, which must still be given final approval by both companies and pass muster with Government antitrust regulators, would also give Pepsico a boost in its efforts to catch its archrival, Coca-Cola, in fountain sales of soft drinks.
Most of Kentucky Fried Chicken's outlets serve Coke products from their fountains, but Pepsico will immediately switch the 1,800 company-owned restaurants to its own beverages and will make a big push to get the franchised outlets to switch as well. Kentucky Fried Chicken is Coke's second-largest fountain account, behind McDonald's.
''We'll certainly be aggressive,'' said D. Wayne Calloway, Pepsico's chairman. About 1,000 of the 4,600 Kentucky Fried Chicken franchises already serve Pepsico products.
But Pepsico stressed that the major reason for the acquisition was to expand its restaurant business, which last year accounted for 26 percent of its revenues of $8.1 billion.
RJR Nabisco has been rumored for several months to be interested in selling the chicken chain, which does not fit its strategy of concentrating on its tobacco and packaged foods products. The companies described the $850 million sales price as being Kentucky Fried Chicken's book value. RJR acquired Kentucky Fried Chicken in 1982 as part of its purchase of Heublein Inc.
''Everybody wins,'' said Emanuel Goldman, an analyst at Montgomery Securities Inc. in San Francisco.
''Pepsi wins because they become an enormously large force in restaurants,'' Mr. Goldman said. ''It's McDonald's in hamburgers and Pepsi in most of the rest.
''RJR wins because they achieve their goal of becoming solely a packaged goods business and not a retailer,'' Mr. Goldman said.
RJR Nabisco also completed yesterday its agreement for Cadbury Schweppes P.L.C. to acquire Canada Dry.
Analysts said that Kentucky Fried Chicken would mesh well with Pizza Hut and Taco Bell, which compete in fast-growing categories while largely avoiding the marketing muscle of the huge hamburger chains. Pepsico should be able to apply its own restaurant and marketing expertise to Kentucky Fried Chicken, analysts said, and should be particularly active in introducing new products, something it has excelled at with Pizza Hut.
''It's a terrific strategic fit,'' said Jay Nelson, an analyst at Brown Brothers Harriman & Company. ''They've demonstrated that they can operate complex systems efficiently and be an innovator in menu items.''
Analysts suggested that Pepsico might expand Kentucky Fried Chicken's menu beyond fried products into roast and barbecue chickens and chicken sandwiches. Pepsico might also provide funds to upgrade Kentucky Fried Chicken's locations, many of which have limited or no seating.
''We don't have to go learn a new business,'' Mr. Calloway said. ''It's a business that's responsive to new products and the marketing things we bring to the party. We're comfortable with franchisees and we know the restaurant business.''
But Pepsico will have to cope with more competition in chicken than it has experienced in pizza and Mexican food. While none of the other chicken chains, which include Church's and Popeye's, approach Kentucky Fried Chicken in size, the hamburger chains are now aggressively promoting their own chicken items, including popular nugget products. McDonald's, for example, is estimated to sell more than $1 billion in chicken a year.
Analysts said that Kentucky Fried Chicken had operating earnings last year of $91.5 million, about equal to the previous year. Revenues were $1.1 billion. Revenues, distinct from system sales, consist of franchise fees and royalties as well as sales from company-owned outlets. Systemwide sales are the total sales at all outlets, franchised and company owned.
Mr. Nelson of Brown Brothers said the deal should not result in any dilution of Pepsico's earnings.
Analysts speculated that RJR would use the proceeds of the sale to buy back stock, pay down some of the debt taken on by the acquisition of Nabisco last year or to make another acquisition. An RJR spokesman, Maura Payne, said the board had made no decision about how to use the funds.
Speculation about a share repurchase helped push RJR's stock price up $3.25 a share, to $52.625, in heavy trading on the New York Stock Exchange yesterday. Pepsico was also buoyed by the announcement, closing up $1.125 a share, to $33.
The deal continues a period of aggressive acquisitions on Pepsico's part. Just last week the company announced the purchase of the Seven-Up Company's international soft drink operations for $246 million, after Federal antitrust objections scuttled Pepsico's plans to buy all of Seven-Up. This spring the Government approved Pepsico's purchase of the MEI Corporation, one of Pepsico's largest bottlers, for $590 million. RANKING THE FAST FOOD CHAINS
System-wide sales for 1985, in billions of dollars:
Macdonalds...$11; Burger King...4.3; Kentucky Fried Chicken...3.5; Wendy's...2.7; Pizza Hut...2.6; Hardee's...1.9; Dairy Queen...1.6; Domino Pizza...1.0; Taco Bell...1.0; Denny's...1.0. *Owned by Pepsico. (Source: Smith Barney)
Pepsi Restaurants Like Kentucky Fried Chicken Taco Bell and Pizza Hut
Source: https://www.nytimes.com/1986/07/25/business/pepsico-to-acquire-kentucky-fried.html
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