Popeyes Trying To Take Out A KFC Market

By Jonathan Maze, October 17, 2012

Here's one way to stick it to your competition: buy out a bunch of their bankrupt restaurants and take out a big market. That's exactly what Popeyes Louisiana Kitchen is trying to do to its rival KFC. The Atlanta-based chain has an agreement to buy 28 locations, which it plans to convert, from the bankrupt KFC franchisee Wagstaff Management.

Popeyes has an agreement to pay $13.8 million for the locations, which are in Minnesota and California, or about $476,000 per unit. The chain announced the deal yesterday, but a federal bankruptcy court has yet to approve the deal. We've been told that KFC is expected to object the agreement—meaning it's far from being finalized. A court hearing is set for November 6.

We'd be surprised if KFC didn't object. Popeyes would be buying 28 of 49 units up for sale, the rest could possibly close. Of those 28, 14 are in the Minneapolis-St. Paul area, and Wagstaff owns several others in the market, totaling at least half the KFCs there. Essentially, Popeyes would  take much of the Twin Cities market away from its main rival. Currently, Popeyes has only one location in the Twin Cities area.

Imagine, for instance, if Burger King came into a sizable market, bought half of the McDonald's locations there, and converted them to Burger Kings. That's what Popeyes wants to do with KFC in Minnesota and in Northern California.

While KFC may object, however, the court could well let Popeyes buy the locations because there are no other options. No other bidders have come forward for the 49 locations, and Wagstaff Management has until the end of this month to sell the units, according to bankruptcy documents. And even this sale won't likely come close to paying off the $45 million owed to GE.

Wagstaff has 76 units, and at one point had more than 80 locations and was one of KFC's biggest and most well-respected operators. But it struggled during the recession and fell behind on ad fund payments, prompting KFC to terminate the company and its restaurants. (Some of the other stores not affected by this sale are being sold to other buyers).

Wagstaff tried to reorganize and sell the restaurants, but failed, prompting the bankruptcy and a difficult legal dispute with KFC, which put severe restrictions on the sale process. The two sides fought over the franchisor's right to terminate the units. KFC won court battles, and by February the two sides agreed to allow Wagstaff to keep operating the restaurants to find a buyer. KFC has yet to demand the restaurants close.

Still, the sale process was a difficult one. According to bankruptcy court filings, KFC "refused to actively engage" with the company trying to sell the restaurants, "which substantially hindered the entire sale process." Alvarez & Marsal, the New York-based consulting firm used to sell the restaurants, initially spoke with 26 interested buyers, five of which ultimately submitted a bid for the restaurants, none of them for all 49 being sold, and none were deemed satisfactory.

Popeyes' parent company, AFC, was not among the five, but it kept investigating the properties and ultimately made an offer for some of the locations. There was one other offer for 33 locations, according to bankruptcy documents, but the buyer didn't have KFC's approval, and it ultimately didn't have the cash to make the deal, anyway.

Unless another buyer emerges, the court would seem to have little choice but to let the restaurants be sold to Popeyes. Wagstaff's equity holders don't have the wherewithal to fund a reorganization, according to filings, the company has less than $70,000 in cash, which it says in bankruptcy filings is not enough to pay business expenses, including leases, payments to vendors, sales taxes and payroll.