Retains Bear, Stearns & Co.

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CHICAGO ( -- AFC Enterprises is putting a tentative for-sale sign on its Church's Chicken and Cinnabon chains as the marketer moves to a holding-company format and applies for relisting on the Nasdaq exchange.

AFC has hired Bear, Stearns & Co. to

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explore options available for the brands, said CEO Frank Belatti. In 2003, Church's had systemwide sales of $900 million and Cinnabon $211 million.

Becoming a holding company
"We're going to take a hard look in the marketplace and find out what options we have in terms of how we can add to the value of the brands in terms of our stakeholders," Mr. Belatti told Mr. Belatti projected that by becoming a holding company, as opposed to a franchisor, the company would save up to $15 million in general and administrative expenses.

In a conference call yesterday, Mr. Belatti told analysts that having Church's and Popeyes Chicken and Biscuits in the same portfolio was "preventing our stakeholders from realizing the full value of each brand." He later told, "We don't want to have all of our eggs in one basket with fried chicken brands."

Interest in Cinnabon
Last year, the company sold the North American assets of its Seattle Coffee Co. chain to Starbucks Corp. for $72 million in cash. In late April, the marketer confirmed it would explore alternatives for Cinnabon, the bakery chain known for its massive cinnamon buns. Bids are due next week for Cinnabon, which Mr. Belatti said has attracted 80 to 100 inquiries from a wide scope of companies, including franchise partnerships, grocery, financial firms and other restaurant companies.

"I think what they're doing is smart, which is taking a hard look at what they have, reexamining their portfolio and clinically evaluating the future prospects of each of their brands to make a decision to spin one or more off," said Allan Hickok, consultant of Hickok McMillan Strategic Advisors. "It doesn't necessarily mean they are not good brands or have bright futures or they can't be a source of steady and reliable cash flow. It might mean that the company has concluded that for a variety of factors there is a higher and better use of both their human and financial capital."

Forced to restate earnings
AFC last year was forced to restate earnings since going public in 2001, and struggled through management defections and ousters. Then shares were delisted from the stock market. Now, the Atlanta-based fast-food marketer said it has emerged stronger from its challenges.

"While painful in many regards, [the restatement] has allowed us to be a much more focused and more efficient organization," Mr. Belatti told He insisted that the possible sale, a "portfolio adjustment," had nothing to do with the earnings restatement.

"If we go out and re-list on Nasdaq, we can do so having a strategic game plan in front of people so they can make their decision on that basis," Mr. Belatti said.

Sales growth
Following dismal declines in 2003 for January and February, Popeyes same-store sales for the same period in 2004 grew 0.7% and 2.3%, while Church's grew 8.8% and 4.2%, and Cinnabon sales grew 4.2% and 5%. Using a two-year trend, same-store sales remained in the negative ranges. AFC projected full-year 2004 same-store sales for Popeyes and Church's to grow 1% to 2%, and Cinnabon to grow 2.5% to 3.5%.

If AFC does sell the two brands, it plans to put all of its resources behind the more profitable Popeyes chain and possibly acquire other compatible brands.

As for Church's and Cinnabon, Mr. Belatti disputes the notion that the two brands may be hard to sell considering the current obsession with low-carb and low-fat diets. He said Church's has been "bucking the trend," with its rapidly growing customer base of African-American, Hispanic and blue-collar white consumers. In March, the chain hired multicultural agency Cartel Group of San Antonio, Texas, as its agency of record.

Church's appeal
"[Church's] is a strong cash generator, high-margin business with simple operations and a very nimble group," he said. "Church's has really good appeal to a potential buyer for all of those reasons."

Despite the post-9/11 declines in high-traffic areas such as malls, airports and outlets, Mr. Belatti contends Cinnabon has rebounded from a couple of tough years. He called the brand's grocery launch a success, as well as its introductions of ConAgra Foods' Orville Redenbacher's cinnamon-butter flavored Gourmet Popping Corn brand, lower fat fruit-filled mini buns, Frusia blended beverages and new coffee.

Positive changes at Popeyes
Earlier this week, Popeyes named Kenneth Keymer president. The Cajun-inspired fried-chicken chain with a cult-like following and systemwide sales of $1.5 billion earlier named a new marketing chief, Larry Krueger, and hired independent Cramer-Krasselt as agency of record. With average unit volumes topping $1 million, Popeyes has the "best growth profile" of its portfolio and most other fast-food brands.

"They have the license to move into other areas," Mr. Belatti said, adding that consumers "would give them credit" for serving chicken, seafood, one-pot meals and high-flavor foods. "They have the best prospect to establish a contemporary menu and a contemporary presence and remain relevant in quick-service restaurants as a brand."

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