Chattanooga-based Krystal chain exploring sale

The Krystal Building is located at the corner of Broad Street and M.L. King Boulevard.

Photo by John Rawlston.

The feisty Southeastern restaurant chain famous for its small, steamed burgers is seeking a buyer after fighting its way through the recession.

The Krystal Co., which owns or franchises 364 restaurants in 11 states, said Wednesday it has retained an investment firm to find a new owner for the Chattanooga-based chain.

Krystal CEO Fred Exum said the company is seeking "a new investor" to take over the financial reins of the company from the private investors who bought the firm in 1997.

"The target is to deliver an attractive exit for current shareholders who have been tremendously supportive over the past 14 years, while also establishing a solid platform for our employees to further expand the brand by continuing to serve our loyal customers," he said.

The company, founded during the Great Depression, now has more than 7,000 employees.

Industry officials say it's unlikely that Krystal would be bought by another chain restaurant -- a move that could result in lost jobs locally. Instead, most restaurant sales in the past year have been to private equity investors, said Paul Frumkin, managing editor of Nation's Restaurant News.

"There's been a lot of private equity interest in restaurants this past year," Frumkin said. "It looks like there's going to be more of it, and it probably will be a private equity buy on this."

White Castle, an Ohio-based chain that, like Krystal, is privately owned and known for small, square burgers, previously has been discussed as a possible suitor for Krystal. But White Castle's Jamie Richardson, vice president of corporate relations, was noncommittal on the possibility of a merger.

"We wish Krystal well as they consider a potential sale," he said. "Knowing the strength of the chain's culture, we are certain they'll find the right fit in ownership that will safeguard the qualities of their brand."

Krystal used to be a publicly traded company until a group of investors under the name Port Royal Holdings bought the chain and took it private in 1997. Phil Sanford, who now heads Jackson Hewitt Tax Service, led Krystal's purchase after the company came out of bankruptcy, staying on as head of the company until August 2003.

During his tenure, Sanford pursued a strategy of expanding the company's franchise operations, which saved the company money on start-up restaurant costs but offered less revenue growth.

Exum took over as CEO in 2003 after Sanford. By 2008, the company had changed course and began building more company-owned stores, which offered Krystal more control over the brand and a bigger slice of the profits.

The restaurant chain was able to expand to more than 420 stores by 2002, according to company figures. But Krystal subsequently closed more than 55 stores and laid off employees during the recession.

On the whole, Krystal has seen "significant growth since 1997," Exum said, leaving the brand "well positioned to continue its momentum."

"We have been extremely successful over the last 14 years, which is primarily due to the hard work of all levels of our management team," Exum said. "Krystal is growing, and we are excited about the future opportunities for the brand."

Minneapolis-based Piper Jaffray, an international investment and asset management firm, will work with Krystal during the attempted sale.

As a private entity, Krystal does not release sales numbers, but National Restaurant News estimates Krystal generated sales of $401.0 million in 2010 -- a 3.2 percent decrease from 2009.

In 2003, Krystal earned about $4 million profit, according to SEC filings, which would translate to $4.86 million today when adjusted for inflation. Krystal has remained profitable, but officials for the private company declined to specify income results.

"The brand is well-positioned to continue its momentum and further leverage its historical equity and strong operational performance, presenting a compelling opportunity for a new financial sponsor," Exum said.