Judge clears sale of 14 KFC outlets to Popeyes chain

A bankruptcy judge Wednesday approved the sale of 14 KFC outlets from a bankrupt franchisee to Popeyes, even though KFC itself backed a higher bid for the Twin Cities restaurants.

The franchisee's main creditor, GE Capital, preferred the smaller Popeyes offer and expressed a palpable distrust of KFC in the Minneapolis courtroom of U.S. Bankruptcy Judge Nancy Dreher.

The sale gives Popeyes a sudden, significant presence in the Twin Cities at the expense of KFC, the nation's largest chicken chain. Popeyes has a lone Minneapolis outpost, while KFC has over 40 stores in the Twin Cities, including the 14 slated for sale.

Popeyes, the second-largest U.S. chicken chain, plans to convert the restaurants to its own brand within about five months, said Mel Hope, Popeyes chief financial officer.

GE, owed $45 million, says it's sure that AFC Enterprises, Popeyes' corporate parent, will deliver $13.8 million on Tuesday to buy 28 bankrupt restaurants, 14 each in Minnesota and California.

A GE executive made clear in court that the company couldn't count on KFC to do the same, even though KFC's late-inning bid was for around $17 million. The offer was made by an Oregon-based KFC franchisee with 44 restaurants, including 10 in Minnesota, but it was financed by KFC corporate.

KFC vowed to come up with the money next Tuesday, the slated closing day for the Popeyes deal. GE, however, required the chicken chain to commit to a letter of credit immediately for 100 percent of the purchase price, and KFC wouldn't do it.

'The issue is credibility'

Such a demand is unusual, GE Senior Vice President David Burger acknowleded under questioning from a KFC attorney. But it's not unheard of -- and in this case, it's merited, he said.

"We have had experiences negotiating terms with KFC and then having those terms not being fulfilled," Burger testified. He said he'd rather have the "certainty" of the Popeyes deal.

"The issue is credibility," he later told the Star Tribune.

Attorneys for KFC and KFC franchisee/bidder Todd Stewart said GE had taken over the bankruptcy, to the detriment of other interested parties.

Stewart testified he was "99.5 [percent] certain" KFC would have delivered the money Tuesday. Stewart said he's the next-largest KFC franchisee in Minnesota after Wagstaff Management, which filed Chapter 11 bankruptcy in April 2011.

Chapter 11 allows a company to reorganize finances while shielded from creditors. But Wagstaff decided early that liquidation was the best course and brought in consulting firm Alvarez & Marsal to market its properities.

Alvarez says in court documents it contacted existing KFC franchises and other parties alike this year. But the best deal that came down the pipe and that GE supported was the Popeyes sale.

Alvarez also said KFC hindered the sales process by refusing to actively engage in it, a contention KFC has vehemently denied.

A 'pathetic' case

The Wagstaff case has been notably acrimonious, parties in court acknowledged Wednesday.

So did Dreher. Calling the case "pathetic," she said she'd noticed a lack of "the spirit of negotiation," which is critical to a successful bankruptcy resolution.

"I really don't like this case," Dreher said. "It's one of those cases that gives the bankruptcy system a bad name, and maybe deservedly so."

Mike Hughlett • 612-673-7003