Butler Plans Stock Sale for His Hershel’s Deli Chain

Harold Butler--who introduced the chain coffee shop concept to the nation 30 years ago when he conceived Denny’s--said Wednesday that in six weeks he plans to make a public offering of stock in his latest creation, Hershel’s Deli & Bakery Inc., a flashy, New York-style deli chain.

The public offering of the Riverside-based company comes less than one year after Butler resigned as chairman from financially ailing Naugles Inc., a Fullerton-based operation he expanded from two restaurants into the nation’s second largest Mexican fast food chain with 218 locations. He abruptly sold his interest in Naugles in November at a time that the company faced record losses.

Butler said he hopes to raise $8 million to $9.4 million from the sale of 1.28 million shares of common stock and common stock purchase warrants, along with 60,000 shares of common stock that he is personally selling.

Sold in Units

The stock and warrants will be sold in units of two shares of stock and one warrant. Each unit will sell for $12 to $14.

Butler said he expects the offering, which is being underwritten by Grey Randolph & Abbot Ltd., of Clayton, Mo., to take place in mid-August. Current shareholders, including Butler, will continue to control 54% of the company.

Most of the proceeds from the offering will be used to add eight new Hershel’s in fiscal 1987 to the nine-unit chain. The remainder will be used to repay debts of nearly $2 million to James A. Collins, chairman of Collins Foods International, who will continue to personally hold a $1.85-million stake in Hershel’s, Butler said.

Despite Butler’s track record of expanding his restaurant chains--including Denny’s, Jojos and Naugles--too quickly, few industry analysts and consultants are willing to bet against him in his latest venture.

‘Combination Intriguing’

“The combination of Harold Butler and a fully diversified deli menu is intriguing,” said Dennis Forst, restaurant analyst at Seidler Amdec Securities Inc., Los Angeles.

Forst predicts big things for Hershel’s despite the fact that the chain expects to post fiscal 1986 losses of nearly $2 million on projected sales of $13 million. Butler credits the losses to high start-up costs--each unit costs about $1.8 million--but he said that the individual units are all profitable.

As has been his forte throughout four decades in the restaurant business, Butler is bucking industry trends. He is expanding a new restaurant concept at a time when the industry is facing hard times. While many restaurant operations are contracting, Butler is speaking of hefty growth--a formula that led to the present financial ills at Naugles. He hopes to open 20 units within the next two years.

“Does the country need a chain of delis?” Butler posed in a telephone interview Wednesday. “The answer is yes. No one else has set their sights to do this.”

Creating a New Niche

Analysts agree that the Hershel’s formula--an extensive deli menu, 24-hour service and a full bakery--is highly unusual for a restaurant chain. Much like he did at Denny’s, Butler is once again creating a new niche with Hershel’s. “I’m not familiar with anything that is comparable,” said Forst.

Butler’s interest in Hershel’s dates back to 1984, when he devised the concept. He was still chief executive of Naugles at the time, but he began to spend more and more time at Hershel’s. Finally, in November, 1985, he sold his 36% interest in Naugles for $7 million and used it to help Hershel’s expand to its current nine units, six of which are in California. The company now has more than 500 employees.

Hershel’s represents Butler’s ultimate expression of his long-held belief that customers will pay more for food that is high in quality and piled high on the plate.

Hershel’s features more than 250 menu items, but also a full-line bakery at each of its restaurants. The decor is 1940s art deco--with neon signs, sleek booths and even a full-service soda fountain. And the 24-hour restaurants are all located in highly-trafficked areas.