KFC As An Acquisition Target To El Pollo Loco

El Pollo Loco, Inc. (El Pollo Loco) is a restaurant company that specializes in selling Mexican-styled grilled chicken. Since the Mexican parent company established the restaurants’ outlets in the USA in the year 1980 and sold them to American investors, the company has rapidly expanded its operations. El Pollo Loco is preferred by customers who prefer an authentic Mexican cuisine. Kentucky Fried Chicken (KFC) is an ideal acquisition target for El Pollo Loco.

KFC started its operations in the year 1930 and expanded its operations all over the world (Grimes, 1930). Currently, KFC has a total of 22,621 outlets in 130 countries. The restaurant is known for its unique menu consisting of fried chicken and burgers made using a secret mix of spices. Its menu is based on a secret set of spices that are kept confidential. The secret set of spices is used as a marketing tactic by KFC to promote its menu items all over the world to its customers.

KFC is considered as a totally American brand with little foreign influence over its menu and other service attributes. Just like in the case of McDonald’s, the quintessential value of the KFC brand lies in its association with American values. Any acquirer of the KFC brand can build on this core brand strength to reach its target market customers. Since KFC is the second-largest restaurant chain in the world after McDonald’s, it has also built operational and technological efficiency. The brand’s finances are also in good shape and El Pollo Loco need not spend any money to recover the fortunes of KFC after the completion of the acquisition.

KFC fits within the business vision of El Pollo Loco as both the brands strive to serve well-cooked chicken, burgers, and other beverages to their customers. KFC will also help El Pollo Loco to diversify its offerings to their customers. Since the company mostly focuses on selling authentic Mexican dishes to its customers, adding KFC will help in serving its customers well and increase its revenues.

Due Diligence Checklist

The due diligence checklist details the issues related to the target company that should be checked before making a decision regarding its acquisition. The due diligence checklist includes the issues related to business such as its financials, operations, governmental issues, etc. and the soft issues that include the culture and leadership of the business.

The filled due diligence checklist is included in Appendix- I of this report.

The main sources of the list are the information provided by the company on its website and the various reports published by it periodically. Information regarding the accounting and finance data are taken from the annual reports of the company and the financial briefs regarding the company published on other third party websites. Some information is also taken from the information published in the articles of newspapers and magazines.

By putting the list together, I understood that understanding all the aspects of the business that needs to be acquired is very crucial. Moreover, the acquirer should focus on both the hard and soft issues of the competitor that he wants to acquire to get a better understanding regarding its business model, employees, and operations.

I also understood that getting all the requisite information is a tiresome process. Investors should expend resources to get all the needed information. Digging deeply into the company’s annual reports and internal management reports will provide surprising insights into the functioning of the organization. While most of the information regarding the competitor that is the acquisition target can be sourced from public channels, having private interviews with the senior executives is also important to get a good understanding regarding certain aspects of the business.

Focus Areas

While all the areas of the due diligence checklist are important, the company that wants to acquire another company should focus on certain areas. Paying the utmost attention to these areas is vital to select the most suitable company to be acquired. The focus areas that needs to be selected vary from one company to the other.

 The three focus areas that are most important in the current case involving (El Pollo Loco) are elucidated below:

Market

KFC is a quick-serve restaurant that deals with a small but popular range of food items including Fried Chicken, Burgers, Sodas, Smoothies, etc. While the main items dealt by the restaurant are fixed, the company keeps introducing new variants of menu items regularly. A few of the new variants that are regularly introduced in the market are inspired by local tastes. Mexican and European flavors are some of the most popular items available in its restaurants all over the world. Some of the menu items are limited just to a single country or market.

The business plan of KFC involves attracting professionals, families, and singles who look for quality quick-service restaurants. Unlike other western quick-service restaurants such as McDonald’s, KFC does not put any specific emphasis on specific servings at the restaurant such as breakfast. Instead, the chain aims to attract customers on all the days, all times of the day, and all through the year. Since the restaurant chain was launched, KFC’s management has always emphasized the fried chicken served in the restaurants based on a secret range of ingredients.

KFC does not limit its operations to any specific region. Its outlets are evenly spread across the country. Even in the foreign markets where it has a presence, its stores are spread across the entire target market. There are no specific restrictions on the markets where it can operate as it does not serve beef and beef-based products in its restaurants all over the world. Controversies over the quality of food served in its restaurants have however impacted its reputation in the past. In the year 2014, overall sales have shrunk by 9% and same-store sales have shrunk by 14% when one of its food suppliers in China was found to be resorting to unhygienic practices (Solomon, 2014). Similar incidents pose a serious threat to the future of the KFC chain.

The company focuses on respecting local sentiments. It serves Halal meat in Islamic countries. Owing to a menu that is widely accepted by customers all over the world, KFC can expand its operations in any new market. This key attribute makes KFC a good acquisition fit for El Pollo Loco.

Accounting

Being a part of a listed company, viz. Yum! Brands, Inc. (Yum Brands) KFC’s financial statements are published periodically every quarter. The financial reports are also regularly audited by the statutory auditors appointed by the board. Audited reports are posted on the company’s website and made available to the public and the investors.

No specific controversy was ever reported regarding the published financial information of KFC in the popular media. Similarly, no specific regulatory action was ever taken on the published annual reports and other financial information of the organization.

The accountant’s reports and the management letters to the company are also published periodically and made available to all the interested stakeholders. The authenticity of the financial statements published by the company make KFC an ideal acquisition target. The chance of any discrepancy and false information in the financial reports of the competitor is minimal. This makes it worthwhile to pursue KFC.

The financial records of Yum Brands are audited by KPMG LLP every year (Yum! Brands, 2019). All the accounting standards that are specified by the accounting regulators are followed by the company’s management while reporting the periodical financial information at the stipulated intervals. The appointment of auditors is ratified by the company’s board in the annual meeting of shareholders.

Employee Affairs

Employees are the key to the success of any service organization. KFC puts a special emphasis on recruiting and training quality personnel who can further the interests of the brand. All the new employees of KFC are trained well before they are inducted into the organization. Employees are trained in areas that include food safety, customer service, and familiarization with the business operations of the organization. Even permanent employees of the organization are trained regularly so that they can understand the new best practices and climb the corporate ladder.

Employees are also grouped into teams to impart specialized training. A specialized program called CHAMPS  is offered to all the employees after they are inducted into the organization. CHAMPS covers six key areas of customer expectations, viz. Cleanliness, Accuracy, Hospitality, Product Quality, Maintenance, and Speed. Focused training provided to employees is aimed at improving their efficiency.

 Part-time employment is also offered to students after providing them with basic employee training. Employees are compensated depending upon their performance and employment status in the organization. Top performers can grow to the very top levels in the organization without facing any obstacles. Yum Brands has an independent compensation committee that oversees the compensation policies of the company and the revision of salaries based on the performance of the employees (‘Executive Compensation’, 2018). The company has a ‘clawback’ policy under which the company can recoup a significant part/entire amount of compensation paid to the executives if their conduct results in a significant financial or reputational loss to the company.

Other than the regular salaries paid to the employees, some of the top executives of the organization are compensated in other ways including stock options. A select group of 175 senior employees of Yum Brands are allocated the company’s stock depending upon their performance. Stock options are part of the compensation structure offered to the top employees of the organization.

The senior employees of KFC report to the board of the Yum Brands. All the employees are provided with regular perks such as insurance, bonuses, and other benefits.

Pre-Negotiation Plan

It is very important to plan before initiating negotiations. Planning will help in understading what we want from the negotiation process and what we are ready to offer others. This section deals with the pre-negotiation plan for initiating negotiations with the management of KFC. The interests, goals, and objectives of the negotiation are detailed in this section.

Interests of El Pollo Loco

The intersts of El Pollo Loco in initiating the negotiations are:

1. Protecting the future of the restaurant chain through diversification
2. Initiate negotiations to understand the expectations of KFC’s management in the proposed deal.

Goals of El Pollo Loco

The goals of El Pollo Loco in initiating the negotiations with KFC are:

1. Expand into a wide range of food options beyond Mexican food
2. Diversity the revenue base of the restaurant chain to protect the viability of operations
3. Tap into the delivery and operational prowess of KFC.

Objectives of El Pollo Loco

 The objectives of initiating the negotiatios with KFC are:

1. Build a conglomerate in the restaurant business similar to Yum Brands
2. Leverage upon the vast food distribution network of KFC and counter the growing popularity of stand-alone food delivery businesses
3. Build economies of scale in acquiring the raw materials required and other inputs for running the quick-service restaurant business.

Interests of KFC

The interests of KFC to participate in the negotiation process are:

1. Understand the intention of El Pollo Loco’s management in approaching it for a purchase deal.
2. Arrive at a fair value for the fast-food chain under the
3. Explore the option of selling a mature business such as KFC and invest the proceeds in growing a new business

Goals of KFC

 The goals of KFC in participating in the negotiations with El Pollo Loco are:

1. Consolidate the position of KFC in the niche but fast growing fried chicken business
2. Find a partner who has an exclusive focus on the fried chicken and burger business unlike Yum Brands that is into other businesses as bevereages.

Objectives of KFC

 The objectives of initiating the negotiatios with El Pollo Loco are:

1. Find a new parent who is in the similar line of business but targeting a different customer base
2. Gain expertise in making the food it has been selling for decades with a different flavor.

Appendix- I

Due Diligence Checklist

Item	Description
Technology	Advanced website and app to facilitate easy ordering by customersUse of the latest technology to smoothen operations in the outlets and takeaways.
Market	Deals in Fried Chicken, Burgers, Sodas, Smoothies, etc. Targets professionals, families, and singles out in the eveningsHas a presence all over the world.
Material Agreements	Most of the outlets are run on a franchise model all over the worldThe company enters into legal agreements with franchise owners.
Operations	Operations are run smoothly at the outlets of KFCEfficient operational processes used to speed up operations.
Finance	Details of current and long-term liabilities given in the company’s annual reportsFinancial reports of the organization published on the website and made available to all stakeholders.
Accounting	Financial statements are audited and published every quarter. Yearly financial statements are also publishedAccountant’s reports and management letters to the company are periodically published.
Corporate Records	All minutes of board meetings available on company’s websiteDetails of other business units of Yum Brands given on the company’s website.
Stock Records	Stock records maintined by the company in electroni form and submitted to regulators at stipulated intervals
Employee Affairs	Employees are trained well before inductionPart-time employment provided to students for a fixed time period every dayTraining provided on the basis of programs such as CHAMPS Stock options are given to 175 senior employees of Yum BrandsAll the top employees report to the board of Yum Brands.
Governmental Issues	The company operates with all required permits from the government.
Liability Issues	Has secured patents regarding its secret list of spices and processes.
Culture	An open culture that encourages efficiency and innovationEfforts put to attract and retain the best talent.
Leadership	The company run by a team of experienced executivesLeaders are mostly grown within the organization.