Throwing in the napkin on high-cost states

The cost and aggravation of meeting government requirements may be bad for restaurants, but they’re proving a boon for moving companies. The home office of Carl’s Jr. says it’s had enough of California’s regulatory and tax burdens and will carefully study brochures for a possible new home in Texas.

The pronouncement from Andy Puzder, CEO of parent company CKE Restaurants, follows the throw-up-his-hands gesture a few weeks ago from Jimmy John Liautaud, founder of the Illinois-based Jimmy John’s sandwich chain. The step-up in the state’s tax rate was the last straw for him. Now, he told the local media, he’s considering a relocation to a more business-friendly state.

The two may be starting a parade. Both their states are contending with huge budget deficits that have many observers fretting about insolvency (bankruptcy is not an option for states, so they merely default and stop paying their bills; Illinois has already reneged on costs like medical reimbursements to some institutions).

The list of other states in that plight is a long one. On Tuesday, for instance, Gov. Andrew Cuomo described New York as being functionally bankrupt.

Fortunately for those of us who live and work in the state, he’s emphasizing efficiency and cost cuts over tax increases. But the Empire State is unique in that respect. Consider, for instance, that Illinois raised its corporate income tax by 46%, to seven cents of every dollar in income. It makes you want to help Liautaud with the packing.

Some cities have tried to turn that situation into fertilizer, so to speak. Knowing how burdens can drive businesses away, they’re striving to streamline the permitting process and even cut some of the costs of doing business. New York, for instance, is trying to make the Big Apple an easier place for small businesses to reside. Mayor Bloomberg has also thrown such bones as promising not to wallop businesses with fines under the city’s new letter-graded inspection system.

Chicago, meanwhile, has a neat program that doesn’t get much attention: If a restaurant or other start-up businesses is set up to be green, the city will work with the entrepreneur to streamline the permitting process. As any operator who’s braved the Long Island market or many areas of California will attest, that’s a considerable enticement.

More on the masked bidder for CKE

Reuters reported this morning that the second bidder for CKE Restaurants, the parent of Carl's Jr. and Hardee's, is Apollo Managemet, a private equity firm with a stake in the Garden Fresh buffet chain. Reuters cited unidentified sources, and noted that Apollo neither confirmed nor denied its involvement.

Apollo has also been a lender to U.S. Foodservice, the restaurant distribution giant, and Kronos, a supplier of foodservice time-management technology.

The amount of the second bid was not disclosed in the Reuters report.

Who is that masked bidder?

You have to wonder why the second company to tender a bid for Carl’s Jr. and Hardee’s is hell-bent on masking its identity. Suitor No. 1, after all, is all but hiring skywriters to tout its interest: “Thomas H. Lee wants to do burgers!”

So why the secrecy for would-be buyer No. 2? After thinking about it at length today, I’m convinced there are three possible answers:

1) The bidder is actually Bruce Wayne, who's thinking of the possible movie tie-ins. It’s always dicey when you live over a secret cave and have an alternate crime-fighting ego in the age of YouTube. Besides, Alfred’s not getting any younger, and he could spill the beans about the capes and all those nifty toys if reporters come a-calling.

2) The would-be buyer doesn’t want to drive up the price of CKE Restaurants, the chains' parent, by sparking a bidding war. That, in turn, could be the case if the acquisition is a strategic one. If the addition of those brands makes terrific sense for the suitor, the market might bet the second party would be willing to sweeten its offer.

So what companies fit that fit that bill?

How about Yum Brands? Burgers are a gaping hole in its franchise portfolio, and both Carl’s and Hardee’s have geographic room to grow.

Or how about an East Coast brand that could suddenly have a big presence in the West and Central West? That description could apply to a few brands, including Chick-fil-A. Then again, that’s not the type of operation to do something rash. But it would have the wherewithal.

3) This cloaked suitor doesn’t want to alarm its current employees, or possibly even its investors. It’d rather complete the deal before it needlessly worries key constituencies and creates a nightmare for itself.

But that sounds unlikely. So I’m putting my money on the likelihood that the challenger is a restaurant company who sees the two regional burger chains as good complements to its current holdings.

Then again, I had Kansas winning the NCAA championship.

Who should be buying Carl's Jr.

I’m sure the Vegas odds-makers are already taking action on who'll be the next owner of Carl’s Jr. and Hardee’s, the two main brands in the portfolio of CKE Restaurants. Thomas H. Lee is the favorite, with a deal already on the table to buy it for about $928 million, including debt. Then came word yesterday that Nelson Peltz, the bwana who deftly bagged Wendy’s in 2008, was giving CKE’s slightly bald radials a kick.

They may be the most likely buyers. I keep thinking about who might be the most appropriate buyer, from the standpoint of all parties concerned.It makes me wonder if the big casual-dining companies have the Poppers to reconsider their longstanding pledge never to veer out of that market.

It’s almost a reflex with concerns like Darden, Brinker and OSI (the parents of Red Lobster, Chili’s and Outback Steakhouse, respectively). Ask what new businesses might be a worthwhile acquisition or start-up and they’ll invariably conclude with, “…and of course it’d have to be something in casual dining, since that's where we want to stay.”

Meanwhile, they’re having their turnips mashed by quick-service and fast-casual concepts.

They should consider the bold move of buying a quick-service brand and supercharging it with their casual know-how to create the ultimate fast-casual player—a contender genetically engineered to provide cloth-napkin-caliber service and food, with the value, speed and less-processed foods that have established concepts like Panera and Chipotle as the brands of choice among younger consumers. It’d be the veritable Mike Tyson of the sector.

Carl’s would be the perfect subject for the experiment. It’s been trash-talking for years that it offers a burger comparable to what patrons would find in a casual restaurant, for less than two-thirds of the price. To launch the Six Dollar Burger (it actually sells for under $4), the chain even set up a fake restaurant where patrons were charged $6 for the sandwich. Patrons paid without complaint.

Sure, the acquisition would put those casual-dining giants squarely in franchising, a realm where they’ve at most dabbled before, preferring to grow through corporate development and joint ventures. But their current business models aren’t exactly the envy of the business world. Becoming full-fledged franchisors would really open the valve on cash flow.

Meanwhile, the Carl’s and Hardee’s systems would greatly benefit from the training, research and awesome support services provided by the likes of Darden and Brinker.

It’s a deal casual-dining hunter and quick-service should pursue, especially when you consider that CKE might change hands for just over $1 billion. It’s a buyer’s market, to be sure.