WSJ -- As Krispy Kreme Deadline Looms, Some On Wall St Are Upbeat .............................
March 21, 2005 5:11 p.m.
As Krispy Kreme Deadline Looms, Some On Wall St Are Upbeat
By MARY ELLEN LLOYD
Of DOW JONES NEWSWIRES
CHARLOTTE -- This is a big week for Krispy Kreme Doughnuts Inc. (KKD), and some company watchers are optimistic the financially troubled company will obtain financing.
The Winston-Salem, N.C., company faces a Friday deadline for filing overdue financial results, to avoid tripping a default on its bank debt. Also, the company has said it likely will need to obtain additional cash to run operations by then.
Krispy Kreme shares on Monday rose 3.9% to $8.21; the shares have rebounded from an all-time low of $5.05 on Feb. 24, gaining 63% since then.
"The stock's saying they're going to fix the financing somehow," said one industry analyst, speaking on condition that his name be withheld.
An outside turnaround specialist said it is possible a recent amendment to Krispy Kreme's contract with management firm Kroll Zolfo Cooper LLC is a positive sign. Also stoking optimism: New investments by a few large money managers, including one that is willing to offer Krispy Kreme financing and has helped finance other struggling restaurant companies.
Still, RBC Capital Markets analyst David Geraty said he expects the stock will remain volatile until company officials, whom he said haven't talked to his firm for six months, begin providing more information. "I'm like a lot of people - waiting to see," said Geraty. He doesn't own the stock, but RBC affiliates have banking relationships with Krispy Kreme.
On Friday, Krispy Kreme said it and Kroll Zolfo Cooper had extended to April 30 a deadline for negotiating a "success fee." The fee isn't defined in Krispy Kreme's January agreement, and a spokeswoman wouldn't elaborate.
But a success fee is typically a bonus paid for hitting a critical milestone, said Ian Ratner, principal of Glass Ratner Advisory & Capital Group, a specialty financial advisory firm in Atlanta. Ratner said such milestones can include extending a bank line, selling a business unit, returning to profitability, or, in the case of a bankruptcy filing, successfully negotiating with creditors.
Ratner isn't involved in the Krispy Kreme case, but said he doesn't see a bankruptcy filing benefiting lenders as much as continuing to work with the company, so long as bankers believe in any turnaround plan that may be in the works.
Kroll Zolfo Cooper "may have a sense already they're going to be able to do a bank deal and may be trying to carve out a better success fee," Ratner said.
Krispy Kreme spokeswoman Amy Hughes wouldn't comment. Nor would she comment on moves company officials intend to announce this week or on recent stakes by some new investors.
Courage Capital Management LLC, a Nashville investment firm, on March 11 reported owning 3.9 million shares, or 6.34% of shares outstanding. On Friday, Courage reported it had boosted that stake to 4.8 million shares, or 7.74%.
In a recent interview, Courage Capital President Richard Patton said the firm is no stranger to struggling restaurant companies and has offered financing to Krispy Kreme.
"We have told them that we would be very willing to finance them," Patton said. "We've been involved in other restaurant situations that have had...confusion surrounding them."
He declined to comment further on talks with Krispy Kreme.
Courage was the largest bondholder of Shoney's Inc. as the dining chain struggled mightily earlier this decade, Patton said. The company was acquired by Dallas Lone Star and its minority partner, U.S. Restaurant Properties, in 2002 for $18 million and the assumption of $255 million in debt.
Patton also sits on the board of another Southeastern icon, hamburger chain Krystal Co. That company was bought shortly out of bankruptcy protection in 1997 by privately held Port Royal Holdings Inc. Like Krispy Kreme, Krystal has franchised and company-owned stores and a strong regional brand.
Meanwhile, an Australian firm that focuses on value plays also has taken a sizable chunk of Krispy Kreme. Hunter Hall Investment Management Ltd. acquired 4 million shares, or a 6.55% stake, the company reported in a filing to the SEC. The investment-management company is a trustee of several trusts and said it didn't acquire the stake to change or influence control over Krispy Kreme.
The firm typically focuses on deep value plays with small to medium capitalizations and is Australia's largest "ethical," or socially responsible, investor, according to local publications. Firm executives couldn't be reached immediately for comment.
-By Mary Ellen Lloyd, Dow Jones Newswires, 704-371-4033; maryellen.lloyd@dowjones.com
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