New directors signal new direction for Frisch's

Sunday, October 4, 1998

The Cincinnati Enquirer

CEO Craig Maier
(Michael Snyder photo)

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There existed a time, oh, two decades ago, when the head of Frisch's Restaurants Inc. would pack up his prospectus and conduct road shows on Wall Street.

His efforts to sell the chain's stock usually fell flat, though, even when company performance was strong. Frisch's, after all, was a tiny Midwestern chain of family restaurants in an industry crowded by McDonald's, Pizza Hut and Perkins Pancake House. After repeated attempts, he ended his lobbying and came home to Cincinnati.

Relating the story last week, Craig Maier, Frisch's chief executive, said management eventually believed that it was impossible to generate interest in Frisch's stock. So they stopped.

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But now on the verge of a minor restructuring that follows two years of housecleaning, Frisch's has again found religion on Wall Street.

And this time, it has targeted a new market with whom to evangelize.

"We will give it our best continuing shot," Mr. Maier said. "We will try.

"But we need to be more focused."

It is one of a few key objectives for the Big Boy chain as it enters its 61st year. Looking into the future, Mr. Maier sees a restaurant and hospitality company with:

  • An expanding new franchise of family restaurants, called Golden Corral.

  • A new look for its Quality Hotels, including an upscale name for the site in Covington.

  • An advancing stock that ultimately could trade at multiples of its current price.

Monday, at its annual meeting, Frisch's shareholders are expected to elect to its board two new directors who have been hand-selected to help achieve those goals.

Mr. Maier said the election of the businessmen is necessary to bring Frisch's into the future after 48 months of ramping up and slimming down. In the past two years, while under pressure from two dissident directors, the chain has unloaded non-core assets and unprofitable restaurants, and it has tightened operations. Earnings improved to $4.5 million from $1.2 million, but Frisch's thinly traded stock continued to languish, trading at $9 to $11.50 in the past three months.

Two years ago, it was trading at $11 to $14 in the same period. Some of Frisch's long-time shareholders are restless.

"I have a portfolio, and I learned that if you're ahead of the game, it's OK," said Erwin Deutscher, who has owned shares of Frisch's since it went public in 1960. "But it should not be between $9 and $10.

"That's stupid, almost."

Selling their story

Frisch's began to write the introduction to its stock turnaround story this summer, with the nomination of the two directors. One, Lorrence Kellar, is vice president of real estate of Kmart Corp. He can help Frisch's negotiate properties as it expands its Golden Corral restaurant franchise in the next seven years.

The other, William Reik, is managing director of William D. Witter Inc. in New York, which owns a near-10 percent stake in Frisch's. He can promote Frisch's stock on Wall Street.

"Being our largest non-family shareholder, he has a great concern in helping the company do better," Mr. Maier said of Mr. Reik. "Bill also has the ability, the advice, to sell our story to the street."

Accomplishing that will require more than the simple Street smarts that Frisch's counted on during its 1970s road shows. It involves knowing the right people.

Since Frisch's is so thinly traded and its float is so small -- average daily volume in September was 1,800 -- large-scale traders aren't interested, Mr. Maier said.

He suggests that the company target investors who specialize in small-cap or so-called orphan stocks, the latter of which are significantly controlled by insiders. (About a third of Frisch's stock is owned by the Maier family.)

Mr. Reik, who has owned shares of Frisch's for decades, will serve as a liaison to these traders.

Mr. Reik declined to detail what he wanted to do for Frisch's as a director. "I'm delighted to have the opportunity to work for them" was his limited comment.

But two of the outgoing directors wish him luck, particularly with the stock price.

"There's no volume, and there's no level of interest at all in Frisch's," said Jerry Ruyan, who, with Barry Nussbaum represented a dissident faction on the board. In the past two years, Messrs. Ruyan and Nussbaum pushed Frisch's to sell a horse farm and its stake in the Cincinnati Reds.

The nomination of Messrs. Reik and Kellar means their ouster. "Investors are no different than our customers. They have many, many options in which to invest their money," Mr. Ruyan said. "We need to advertise to them and communicate the fact that we're doing well."

The existing directors have done some work to stimulate interest and activity in the stock. Frisch's latest proxy statement includes a new employee stock option program that allows roughly 2,500 eligible workers to buy shares at a 15 percent discount.

Mr. Maier said market capitalization -- the value of the company's roughly 6 million outstanding shares -- ideally should meet annual revenue. That means an aggressive, threefold advance: Revenue in fiscal 1998 capped $150 million, while market capitalization has been hovering around $55 million.

In trying to achieve that, Frisch's has one thing going for it: its tenure, said Ed Haberer, president of Haberer Registered Investment Advisor Inc.

"I think there's something to be said for a company to be in business for as long as they have," he said.

Shifting the focus

But if Frisch's wants to strengthen its position on Wall Street, it also needs to tell a story of growth that is also profitable. In the past several years, some of the chain's endeavors -- including a Hardees franchise and some out-of-town Big Boys -- have been money losers.

"We put Big Boys in places where we had absolutely no business," Mr. Maier said.

For him, profitable growth now means holding the Big Boys to 88 stores while focusing on building the Golden Corral franchise and company's two Quality Hotels.

Frisch's plans in 1999 to change its Covington hotel to a more upscale, yet-to-be-released, name. The hotel in Norwood, meanwhile, has transformed its less-profitable upscale restaurant, the Dockside VI Seafood Co., for a casual one: Highlands Bar & Grill. "If the hotels do not generate the projected profits that we think they will, then they'll have to go," Mr. Maier said.

But, he added quickly: "We really don't think that will happen." As for the restaurants, Frisch's does not plan on opening another Big Boy before 2000. Last year, it closed 15 of the restaurants in Ohio, Kentucky and Indiana after they proved unprofitable. In doing so, Frisch's retreated from the Indianapolis market.

The new focus could be a good plan. Industry observers say competition by theme and fast-food chains is hammering the family-style restaurant segment.

"Sales have been down for the last five years," said Patricia Dailey, managing editor of Restaurants & Institutions magazine. "It's just not the most exciting group of restaurants.

"(Families) can pick something that is just as convenient, just as inexpensive and a little more interesting."

By franchising Golden Corral, Frisch's is broadening its chances of appealing to the market.

Here is where Mr. Kellar's real estate expertise will be vital. Frisch's in the next seven years plans to open 23 of the two-acre, buffet-style restaurants and will likely have to coordinate the properties for each. The first is planned to open in January near Forest Fair Mall. Frisch's is negotiating other properties in Eastgate and Price Hill.

The investment can top $45 million, the sum of which will be paid down through long-term cash flow and initial debt.

If the restaurants perform on plan, they will come to represent about one-third of Frisch's business, Mr. Maier said. In 1997, Golden Corrals on average generated $1.7 million each, according to Technomic Inc., a Chicago-area food industry researcher. A typical Frisch's, at about half the size each, generated $1.3 million.

Perhaps after five years, Frisch's can creep back into far-reaching markets such as Indianapolis. But, Mr. Maier stressed, the company will do it a lot more carefully and certainly more cheaply.

"We're in a transition of what was, and what will be."

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