NEW YORK (CNN/Money) -
Not in the mood for a drive-through burger? No problem, says Wendy's International. Try a fresh Mexican meal.
The nation's No. 3 restaurant chain said Friday it signed a definitive agreement to acquire the owner of the Baja Fresh Mexican Grill chain for $275 million cash.
Shares of Wendy's (WEN: up $1.73 to $37.73, Research, Estimates) were up more than 4 percent in midday trading Friday following the announcement. The stock has jumped 24 percent since January, thanks mainly to the strength of its core business, A.G. Edwards & Sons analyst Jack Russo said.
Wendy's said it expects to finance the acquisition of privately held Fresh Enterprises Inc. with a combination of cash and issuance of new debt.
But don't expect any references to Wendy's founder Dave Thomas in any burrito ads.
Wendy's Chairman and CEO Jack Schuessler told CNN/Money Friday the company would not mention Thomas in any future marketing or advertising for the Baja Fresh chain. Thomas, who died in January at age 69, popularized the chain he named for his daughter by frequently appearing in humorous television and radio spots for the company.
"We're not putting Dave or his image back in the [Baja Fresh] ads," Schuessler said.
Baja Fresh marks yet another direction for Dublin, Ohio-based Wendy's, which acquired the Canadian doughnut and coffee chain Tim Hortons in 1995 and has been trying new ideas to expand the business beyond the usual burger options.
"We've done a lot of consumer research focusing on trends of the future," Schuessler said. "People want ethnic flavors and bold taste, high-quality food and convenience ... Baja is the quality leader in the Mexican segment."
Baja Fresh has no drive-through window and uses no frozen food, Schuessler said. Food is prepared fresh without steam tables. The restaurants also feature salsa bars with several different flavors and condiments.
"We feel it's poised to become a national chain. It will stay under the Wendy's umbrella," Schuessler said.
The Baja Fresh chain, which was founded in 1990, has expanded from 45 restaurants to 170 and had system-wide sales of $177 million in 2001, a 65 percent increase from the previous year. Sales at stores open at least a year, a key gauge known as same-store sales, increased 7.8 percent in 2001.
About 65 percent of its restaurants are located in California. Wendy's sees Baja Fresh as a growth vehicle and has plans to open 600-to-700 restaurants nationwide by 2007, Schuessler said.
"It's an intriguing acquisition for them. "I don't think they paid all that much for it, but they're taking a big bet on the fact that this category is going to take off," said Russo, who maintains a "neutral" rating on the stock.
But Wendy's has a strong batting average when it comes to acquisitions, Russo said, noting that Tim Hortons was a "home run" for the company. Wendy's has more than doubled that chain's size since acquiring it seven years ago.
Under terms of the deal, which the companies expect to complete in June, Baja Fresh will become a wholly owned subsidiary of Wendy's, maintaining its headquarters in Thousand Oaks, Calif.
"Baja Fresh is an excellent addition to our company and a great fit for our long-term growth strategy," Schuessler said.
The deal comes as large, mature restaurant chains are searching for ways to grow their brands following a year in which a recession, tainted beef fears, and overseas economic crises have hurt the bottom line.
McDonald's Corp (MCD: down $0.05 to $29.72, Research, Estimates)., the world's largest restaurant chain, has acquired other popular brands such as Boston Market and Donato's Pizza. Earlier this week, the company said it was exploring the possibility of starting a retail operation at its restaurants where it would sell non-food items.
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Wendy's said that the Baja Fresh acquisition would be slightly dilutive to earnings in 2002 and 2003 and accretive in 2004. The company reaffirmed expectations for 2002 earnings per share of $1.85-to-$1.90. Analysts polled by earnings tracker First Call expect earnings of $1.90 a share. The company also projects long term earnings growth of 12-to-15 percent.
"We are confident that we can meet our growth objectives in 2002 due to stronger-than-expected sales at Wendy's and Tim Hortons, improvement in the Canadian foreign exchange rate, and lower costs for beef at Wendy's," Chief Financial Officer Kerrii Anderson said.
Wendy's reported April same-store sales growth of 5.7 percent, and said it is on track for 6-to-6.5 percent same-store sales growth in May.
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