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Addition by subtraction Featured

9:46am EDT November 22, 2005
During a six-month period last year, the executive team at AFC Enterprises divested the company of some of the most recognized names in the food industry.

AFC Enterprises Chairman Frank Belatti led the charge that started more than two years ago and culminated in the sale of Seattle’s Best Coffee, Torrefazione Italian Coffee, Cinnabon and Church’s Chicken, leaving only Popeyes Chicken & Biscuits.

“It’s a lot easier to buy things than it is to sell and dismantle, but at the end of the day, we wound up at a better place,” Belatti says. “We have a much more streamlined business today, we generated a great deal of cash, we made a good one-time dividend to shareholders.”

Belatti hasn’t entirely ruled out rebuilding the portfolio some time down the road, but for now, the sole focus is Popeyes.

“We have a company now that is relatively easy to understand and to manage and has good growth prospects, and we’re pretty much exactly where we wanted to be when we started the process two-and-a-half years ago,” he says.

Smart Business spoke with Belatti about how he divested AFC Enterprises of those companies.

Why did you divest of those companies?
We went through the process in the early days of putting together AFC that we could leverage a corporate center, which we structured for the management of Church’s and Popeyes. And as that began to mature, we looked at the prospect of adding some additional brands and businesses.

After we went public, we started looking very aggressively at the performance of those businesses and whether or not the businesses were demonstrating the kind of growth rate that we thought in the long term was going to be beneficial to the company and whether or not the corporate center was really being fully leveraged.

Our stance was that, as a public company, the best approach for us would be to sell the businesses other than Popeyes and dismantle the corporate center and run Popeyes as a stand-alone public company, and that would probably garner the highest value for shareholders. About two years ago, we started selling off businesses that we considered either to be not core or not having the kind of growth dimensions that we had originally hoped.

How did you decide which entities to divest of?
Our experience with the coffee (business) is that garnering real estate was a very difficult proposition given the fact that Starbucks had and continues to have a real estate machine. It was very difficult to get the sites we needed.

Secondly, our volumes were not as high as the Starbucks volumes. Thirdly, we started to see most of the growth in the coffee business occurring at grocery retail and food service wholesale, and the caf business was struggling from the standpoint of unit growth.

Grocery and wholesale were not exactly the businesses we wanted to be in. So given the underperformance of caf unit growth, it just was deemed as a business that was not working the way we had wanted.

Cinnabon we bought as corollary to the coffee business, thinking we could merge a bakery business into the coffee. The realities of the Cinnabon business, however, were that they were so mall-based, and we were clearly living with the mall dynamics and captive venues in airports, which struggled for several years. Since we were so dependent on foot traffic, that business was not showing the average unit volume and unit growth that we were expecting of it.

When you get down to the chicken brands, after 10 years, it became somewhat apparent to us that the brands were very independent. They were clearly working on their own at this point in time, not really requiring a great deal of the corporate center.

(They were), in fact, probably at odds with what the center was trying to do because we had kind of a vanilla service platform and the brands were trying to become more and more and more unique. Franchise partners began to say, ‘You know, what we’re getting awfully close to one another from a concept perspective.’

Both brands were clearly at a point where they were perhaps prepared to move off on their own much better than we could have continued to manage them, service them and run them effectively.

Why keep just Popeyes?
We thought ... that the brand that had the highest growth perspective, the highest growth platform domestically and internationally, the highest average unit volumes and was predominantly franchised was the one we most wanted to hold on to.

We thought it would also deliver the highest value to shareholders in the long run, and so we made the decision to sell Church’s and held on to Popeyes.

Have you achieved your goals following the divestitures?
We sold the three businesses for somewhere around $500 million. That cash, along with (eliminating) the corporate center, saved the company another $25 million a year. We paid down debt, capitalized the company and we returned to shareholders $12 a share, about $360 million. We now have a company that is operating at about $35 million a year with very little capital requirements.

The coffee business was rather capital intensive. We were in the process of having to purchase or build or lease additional coffee processing facilities and new technologies. Church’s was very capital-intensive. When you have got about 300 restaurants to maintain with a relatively old operating base, a lot of capital is required in that business.

All things considered, as a shareholder, you have to say you should be pleased with a company that was able to monetize its assets, return those proceeds to you and now be sitting on top of a highly profitable noncapital-intensive operation that has the highest growth prospects of all the brands that were in the portfolio.

How important was communication as you went through this process?
I think we relied very heavily on the presidents of the operating companies to continue to do the work that they were hired to do. I spoke with the franchisees of each of the groups at their conferences and with the leadership of the franchise communities and assured them that our goal was to not only do what we thought was right for AFC but what was right for them and the future of their brands.

We consider ourselves stewards of these brands and we had tried to do the very best we could with those brands while we had them. And I think the sense of the franchisees was that we had done well ... and they trusted us to put them in the hands of owners who would then take them to the next level.

We told them that in each case, that if we didn’t find the right owner or we didn’t find the right conditions, that we were under no obligation, no pressure to sell the businesses and that we wouldn’t unless we thought we were doing the right thing for the brands and for their long-term security, as well as for the company.

How closely did you follow a plan for the divestiture?
Each decision was made independent of the others, but clearly, from the beginning, there was a path that we wanted to move down. Of course, you never know when it takes that long how things develop and what market conditions are like and what the active participation by buyers is and so on.

In each case, you have to make a decision on its own merit and again, if the long-term strategies are in the shareholders’ best interest, it has to be made up of individual and independent decisions, which also affects shareholders in the right way. So I think you go down a path and make decisions one at a time.

Is there still a need for AFC Enterprises now that there’s only one company?
It’s really a legal entity. AFC Enterprises today is Popeyes, and I think the need for the legal entity remains necessary. Whether that will always be the case or not, I don’t really know, but today it certainly remains necessary.

A lot of the good things about what we’re able to do is that we had businesses that were able to be separated and able to be sold into the marketplace, into a good market. We didn’t have to continue to operate something that we didn’t necessarily want to operate long-term.

Would AFC consider buying another business to complement Popeyes?
This is probably not a good time because we’ve been through a lot of upheaval in the last couple of years and we certainly don’t want to do anything to confuse the normalcy that has come back to our business. Once normalcy occurs and once things are transparent to shareholders and they’ve got their arms around the business and we think that everything is where it needs to be, then I think it’s certainly possible.

I don’t think it’s necessary but I think it’s possible that we would be in the marketplace and looking to expand the portfolio if we thought it was going to be beneficial to shareholders. That process certainly hasn’t begun, but the mechanism is clearly in place to be able do that.

HOW TO REACH: AFC Enterprises, 404-459-4450 or www.afce.com

Editor’s note: Kristy O’Hara contributed to this story.