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McDonald's Buys Most Assets of Boston Chicken

Essentially, McDonald's is acquiring the company for little more than it owes its major creditors.
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Updated from 3:40 p.m. EST


(MCD) - Get McDonald's Corporation Report

said Wednesday that it had agreed to buy most of the assets of

Boston Chicken


, which is in Chapter 11 bankruptcy, and its subsidiary

Boston Market

for $173.5 million in cash and assumed debt.

The deal is a climax in the tumultuous history of Boston Chicken, whose stock was one of the hottest IPOs of the early 1990s.

McDonald's will acquire 751 restaurants and franchise rights for an additional 108 restaurants.

McDonald's chief financial officer, Mike Conley, said in a conference with analysts and investors, "We believe the value of the real estate really covers our acquisition price."

The senior secured creditors of Boston Chicken approved the bid made by a McDonald's subsidiary,

Golden Restaurant Operations

, clearing the way for bankruptcy court approval.

Essentially, McDonald's is acquiring the Golden, Colo.- based company for little more than it owes its major creditors. Other more junior creditors and shareholders of Boston Chicken will receive nothing, as the company disclosed after filing for bankruptcy protection on October 1998.

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Boston Chicken said it had debt obligations exceeding $900 million.

Basically, the deal gives McDonald's two options, said Paul Westra, an analyst at

CS First Boston

who rates McDonald's a strong buy. "They can use the value of the brand or explore Boston Market's relationship with



, through which it would roll out its food through grocery stores." Westra does not rate Boston Market, and his firm has done no underwriting for either McDonald's or Boston Market.

McDonald's has been cautiously dipping its toes in this stream of revenue by selling McDonald's ketchup in German grocery stores, according to Westra.

McDonald's stock showed little reaction to the deal, closing up 19/32, or 1%, to 46 5/16. Boston Chicken settled down 15/64, or 60%, at 5/32.

"Through this transaction, McDonald's will acquire both Boston Market sites and the rights to the brand," said Jack Greenberg, chairman and chief executive of McDonald's.

"The brand is well established, with excellent employees, quality products, loyal customers, and future growth potential," he said in a statement. "Selected sites, where appropriate, will help support domestic restaurant growth for McDonald's, and accelerate opportunities for (McDonald's units)

Chipotle Mexican Grill


Donatos Pizza

over the next few years."

According to Conley, "We will operate it (Boston Market) as a separate business and add efficiencies from our supply chain to it as we do for Chipotle and Donatos."

Preempting analysts' questions during the call, Conley outlined three more aspects of the acquisition. "We are acquiring an established brand that won't compete with McDonald's because it offers a separate dining experience," he said.

Furthermore, management remains focused on the McDonald's brand and does not expect Boston Market operations to impact McDonald's earnings, Conley concluded.

Boston Chicken expects to file its plan of bankruptcy reorganization this month and the deal with McDonald's is expected to close in mid-2000, according to the statement.

"We are very encouraged to have such a strong buyer," said J. Michael Jenkins, chief executive of Boston Chicken. "This commitment is a direct result of the tremendous job our employees have done over the past year in returning the business to positive comparable store sales and positive operating cash flows."

The deal does not include Boston Chicken's 54% stake in

Einstein/Noah Bagel


Boston Chicken became a public company in 1993, and its stock more than doubled on its first day of trading.

The company posted rising earnings until late 1997, when it became evident that the profits were artificial because they reflected payments by franchise owners that were staying afloat only thanks to loans from Boston Chicken. In 1998, Boston Chicken took a huge loss -- well above the total profits it had reported since it went public -- as it wrote off many of those loans.