• Acquisition of Yorkshire brands won't be Tricon's last, says CEO

LOUISVILLE, Ky. -- Tricon Global Restaurants' CEO David Novak believes his company's acquisition of Yorkshire Global Restaurants will more than double its multibrand opportunities in the U.S. and strengthen its international growth.

Yorkshire, headquartered in Lexington, Ky., owns 1,225 Long John Silver's seafood stores and 970, burger-based A&W All American Foods stores.

Cost of the deal was $320 million, including $270 million in cash, and the assumption of $50 million of debt.

During a March 12 conference call from Yorkshire headquarters, Novak said the company will use its broader multibrand strategy to compete head to head with McDonald's. The world's most famous burger chain, he said, achieves its impressive average unit sales of $1.6 million dollars by offering a broad menu attracting a wide range of customers. By comparison, Tricon's Pizza Hut, KFC and Taco Bell brands produce per-store sales some 40 to 50 percent less.

Tricon's 1,500 U.S. multibrand stores, Novak said, have proven successful at increasing sales comparable to McDonald's by drawing a wider customer base and generating more frequent visits.

Combining the brand strengths of each concept into new and existing locations, rather than trying to add new products to each concept's menu, he said, has allowed the company to boost sales significantly beyond those culled at single-brand units.

"No one is waiting with baited breath for a Taco Bell burger or a Pizza Hut breakfast," said Novak, adding that customer surveys showed quick-service patrons prefer multibrand options over single-brand options by a 6-1 ratio. "What we've proved with multibrand units is that ... customers are wowed by getting two brands in one store."

More Purchases to Come

Novak also said its most recent acquisition won't be the last. One part of its continued growth strategy "is to create our own brands or pair up with nascent concepts."

He said a new chicken wing under test at KFC has received positive scores, and that a cobrand test with Memphis-based Backyard Burgers at Taco Bell and Pizza Hut sites also has gone well.

"We think that taking an emerging pasta chain or sandwich chain and offering that up with Pizza Hut, and potentially a premium burger, will bring more choice to the Pizza Hut asset."

Overall, Tricon's results in stores cobranded with Yorkshire's concepts have shown the most promise, Novak said. Currently, the two companies have 83 multibrand units and plans to open 100 more this year. Adding Long John Silvers and A&W, he said, enables the company to open as many as 4,000 more multibrand stores in the U.S. alone, as well as others overseas.

"When you combine a Taco Bell with an A&W or a Long John Silver's, we believe that gives us a third international opportunity," Novak said, referring to the fact that Taco Bell is Tricon's only concept not yet expanded beyond the U.S. "We're putting more than 60 percent of our own capital into four countries: China, the U.K., Mexico and Korea."

Tricon CFO David Deno called the acquisition a wise one financially, and said that the hit to company earnings will be a "minor diluted impact of 2 cents a share in 2002."

Additionally, he said making Yorkshire's brands part of the family will boost earnings slightly in 2002 and beyond to 7 percent per year, and that blended comp-store sales should increase a bit to 3 percent.

On Wall Street the deal got mixed reactions. Tricon's stock slipped slightly from $58.05 on March 11, to 55.60 on March 12. As recently as March 8, the stock traded at better than $60 a share.

According to The Wall Street Journal, Fitch Ratings lowered Tricon's debt to BB+ from BBB-, but still gave it a stable outlook.

Morgan Stanley Dean Witter & Co., however, initiated coverage of the stock as "outperform," and set a target price of $65 per share.

Following regulatory approval, the transaction between the two companies should be completed in two to three months. When finished, the new company's name will change to YUM! Brands Inc. YUM also is Tricon's trading symbol on the NYSE.

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