Friday, December 19, 1997

GB Foods Corp.
(Nasdaq: GBFC)
Phone: 714-640-6004
Price (12/18/97): $9 3/4


Who put the green in the Green Burrito? For GB Foods, owner of the popular West Coast Mexican fast food concept, the answer would have to be William Foley II. In many ways, the man who has breathed new life into once stagnant burger chains like Carl's Jr., Rally's, and Checkers is the person GB shareholders should be thanking for the recent spicy gains.

Foley runs CKE Restaurants (NYSE: CKR) and when not purchasing majority stakes in bargain-priced and left-for-dead drive-thru burger emporiums like Rally's and Checkers, he is overseeing the strong growth of the flagship Carl's Jr. chain. The turnaround at CKE is old news. Yet one of Foley's best moves in turning Carl's Jr. around was in striking a deal with GB Foods to set up shop inside the burger restaurants.

The trend towards dual branding has been hot in the fast food industry. If the concepts sharing the roof are diverse enough, it will naturally draw a more varied crowd without incurring more than a modest increase in overhead. It has worked for CKE and GB.

So far this year the number of Carl's Jr. outlets housing a Green Burrito has grown from 84 to 120. That is an impressive hike when one considers that GB Foods only has 41 franchised non-Carl's Jr. units.

The relationship with CKE would be reason enough for investors to send Foley kind words of capital appreciation -- but there was more. Foley also heads up Fidelity National Financial (NYSE: FNF), a provider of title insurance. In a bizarre move this summer, Fidelity bought a 16% stake in GB Foods, with warrants to significantly increase the stake. Foley can't seem to get GB Foods off his mind, and that seems to be quite all right for GB shareholders.


GB Foods, based out of Newport Beach, California, was the franchisor of 161 Green Burrito fast food restaurants as of the end of the third quarter of 1997.


Income Statement
12-month sales: $5.4 million
12-month income: $0.4 million
12-month EPS: $0.10
Profit Margin: 7.4%
Market Cap: $70.2 million

Balance Sheet
Cash: $1.0 million
Current Assets: $3.1 million
Current Liabilities: $0.4 million
Long-term Debt: $0.009 million

Price-to-earnings: 97.5
Price-to-sales: 13


Why would a $300 million insurance company sacrifice its focus for GB Foods? At the time, Foley justified the move by saying, "Our focus remains to diversify our revenue and earnings base to include non-interest rate sensitive lines of business." It made sense since Foley knew first-hand what a cash machine GB was as he sat back to collect the royalty payments from the ever-growing dual-branded locations with CKE.

Fidelity took a hit the day of the announcement, but it has since almost doubled. Fidelity investors have found it easy to forgive Foley now that the 2.5 million warrants to buy shares of GB at $5 a share have appreciated significantly.

Those who followed how CKE came to acquire Rally's, Checkers, and recently Hardee's, may have figured that CKE's association with GB Foods made it a lucrative takeover target. While one should never buy a company based solely on the buyout possibilities -- and the company is still independent -- the logic probably found potential buyers valuing the company on its fast-growing revenue collecting qualities.


On Dec.12 GB announced the acquisition of Timber Lodge Steakhouse (Nasdaq: TBRL). The casual steakhouse restaurant, reviewed in Industry Focus 1998, is a modest yet profitable 16-unit chain. CKE wasn't too far away, though. The deal is subject to Timber Lodge purchasing 12-20 of CKE's struggling JB Restaurant properties and converting them to the woodsy-themed steakery.

Buying a chain for 20 times earnings is favorable on the surface, considering how it will help lower GB Foods bloated price-to-earnings ratio. Underneath it gets even better. Thanks to the JB Restaurants conversion, the size of Timber Lodge is about to double. This is cheap and fast expansion -- not all that different from when WSMP announced the purchase of Sagebrush three months ago.

If and when the deal closes, earnings estimates for GB, which were expected to grow from $0.12 to $0.16 a share this year, should be hiked dramatically. How so? GB will probably only issue about 2.7 million shares for the acquisition. That is just a 38% hike in shares outstanding for a deal that will find revenues and earnings for the merged companies growing at least three-fold next year.

Adding the 1998 earning estimates for both companies ($1.2 million for GB and $1.6 million for Timber Lodge) and dividing it by 10 million shares shows that earnings estimates should grow to at least $0.28 a share -- before considering the impact of the converted units that could push that figure up as high as $0.40 a share even with the warrant conversion from Fidelity.

While the move may dampen GB's focus from the low overhead ease of being a Green Burrito royalty-collecting entity to that of being a physical restaurant operator, suddenly a stock with valuations that seemed high by just about every fundamental barometer now has realistic forward looking P/E, price-to-book, and price-to-sales ratios. That and the very notion that if Foley worked magic on hamburger joints left for roadkill, imagine what he can do to a sector where the stakes -- and steaks -- are higher.

-Rick Aristotle Munarriz

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