Flagstar Companies, Inc
27 Pages Posted: 21 Oct 2008
Abstract
The CEO of Flagstar Companies faced the task of finding a solution to the company's cash flow problem. A leveraged buyout in 1989 had saddled the company with large principal and interest payments. To meet the company's financial obligations, the CEO had cut back on capital expenditures that could otherwise have been used to grow Flagstar's businesses and upgrade existing facilities. Now, it had become apparent that trimming capital expenditures would put the company at a significant competitive disadvantage, and a significant inflow of cash or reduction of the debt balance was necessary for Flagstar to remain a viable company.
Excerpt
UVA-F-1186
FLAGSTAR COMPANIES, INC.
As chief executive office (CEO) of Flagstar Companies, Inc., Jerry Richardson was faced with the difficult task of finding a solution to the company's cash flow problem. A leveraged buyout (LBO) in 1989 had saddled the company with large principal and interest payments. To meet the company's financial obligations, Richardson had been forced to cut back on capital expenditures that could otherwise have been used to grow Flagstar's businesses and upgrade existing facilities. Now, in April 1994, it had become apparent that trimming capital expenditures would put the company at a significant competitive disadvantage and that a significant inflow of cash or reduction of the debt balance was necessary, if Richardson hoped to maintain Flagstar as a viable company.
A potential solution to the problem had been brought to Richardson's attention recently by the Mergers & Acquisitions (M&A) group from NationsBank. The M&A group had suggested an asset solution, whereby Richardson would sell an operating division of Flagstar and use the proceeds of the sale to retire some of the debt on the books. NationsBank had identified Compass Group, a U.K. firm, as a potential buyer of Canteen, a wholly owned subsidiary of Flagstar. While Richardson agreed in principle to the strategy of selling Canteen, he wondered if Compass Group could reasonably be expected to pay enough for Canteen to solve Flagstar's cash flow problem. Moreover, if the sale of Canteen was not the answer to Flagstar's problems, then what other alternatives should he consider?
Flagstar Companies, Inc.
Flagstar was founded by Jerry Richardson and Charles Bradshaw in 1961 as a franchisee of Hardee's fast food restaurants. Richardson, who had played professional football with the Baltimore Colts for three years, used the $ 4,500 he had won when the Colts beat the New York Giants for the championship in 1959 as his equity stake in the business. The company, originally called Spartan Foods, opened 220 Hardee's restaurants before selling out to Trans World Corporation for $ 80 million in 1979. Richardson and Bradshaw continued to run Spartan until 1986, when the company was spun off from Trans World as TW Services, Inc. The new company named Richardson as its president and, under his leadership, bought the restaurant chain Denny's. In addition to the Hardee's and Denny's restaurants, the company eventually owned El Pollo Loco, a regional fast food chain in Southern California; Quincy's, a chain of family steakhouses; and Canteen, which provided food and vending services to corporations and clients, including the National Park Service and Yankee Stadium.
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Keywords: leveraged buyouts
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