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Canada’s first family of freeze buys Cold Stone

Cold Stone Creamery is Kahala Corp.’s best-known asset in Canada, owing to the highly visible partnership it has with Tim Hortons.

J.P. MOCZULSKI/The Globe and Mail

U.S. ice cream company Cold Stone Creamery has been acquired by a group of Canadian entrepreneurs with ambitious plans to double the number of locations with partner Tim Hortons Inc.

The Markham, Ont.-based Serruya family bought a controlling interest in Cold Stone's parent company in an auction. The deal includes a number of fast-food chains, but Cold Stone is the company's most lucrative asset, owing to its highly visible partnership with the coffee and doughnut chain, with which it shares space at more than 250 stores across Canada and the United States.

For the Serruyas, it marks a deeper expansion into a business they have been involved in since the mid-1980s. About a decade ago, they turned CoolBrands International Inc. into one of North America's largest ice-cream producers – before its fortunes collapsed and shareholders lost much of their investment.

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Based in Scottsdale, Ariz., Stone Cold's parent, Kahala Corp., owns more than a dozen fast-food brands around the world, with 3,035 locations in 23 countries and revenues of about $1-billion (U.S.). Its stable of restaurants includes names commonly found in food courts, such as Taco Time, Blimpie Submarines and Samurai Sam's Teriyaki Grill. Private equity firm Delavaco Group Inc., run by Toronto investor Andy DeFrancesco, who has partnered with the Serruyas on other deals, is also taking a stake in Kahala.

The investors are hoping to breathe new life into some of the brands owned by Kahala, while also introducing some of the franchises into Canada. Michael Serruya, who will serve as co-chief executive officer, plans to expand Cold Stone, possibly doubling the partnership locations between Cold Stone and Tim Hortons, particularly in the U.S.

Brothers Michael and Aaron Serruya started the Yogen Früz chain in 1986 and eventually expanded beyond frozen yogurt to create CoolBrands, which became one of North America's largest ice cream makers by 2004, before its fortunes turned.

At its height, CoolBrands had $450-million in revenue and held the rights to popular brands such as Eskimo Pie. However, a dispute with Weight Watchers that resulted in CoolBrands losing the rights to produce a lucrative line of low-calorie frozen snacks led to the eventual unravelling of the company. As revenue fell from the loss of the Weight Watchers business, debt problems mounted and a string of governance and accounting problems emerged that caused investors to flee. CoolBrands began liquidating most of its assets in 2006.

Since then, the Serruyas, including younger brother Simon, have been rebuilding Yogen Früz as a private company, and have launched Yogurty's – a spin-off chain aimed at capitalizing on the recent resurgence in the frozen yogurt market. The popularity of stores such as California's Pink Berry has fed the frozen yogurt trend, but it has also created a problem for ice cream purveyors such as Cold Stone, which have been scrambling for market share.

The Serruyas, who also own the Swensen's premium ice cream brand, are betting the ice cream market can survive the competition. They aim to push further into niche products for Cold Stone, building on licensing agreements forged in recent years, including coffee creamers sold in U.S. supermarkets and flavours licensed to Jelly Belly candies. Cold Stone Creamery operates in more than 1,500 outlets around the world, including locations in China, Indonesia, Turkey and Brazil.

The Kahala deal is an opportunistic purchase, since the company was put up for sale in an unusual liquidation of assets. The company belonged to California billionaire Robert Peterson, who died in 2007. The publishing magnate, a car buff, made his fortune in the 1960s and 1970s with titles such as Hot Rod magazine and Motor Trend. His empire grew to include successful publications from other genres, such as Guns & Ammo, Tiger Beat and Sassy Magazine.

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However, when Mr. Peterson's two sons were killed in a 1975 plane crash, he was left without a natural successor. Following the death of Mr. Peterson's wife Margie in 2011, his estate was liquidated and the proceeds donated to charity. The Kahala sale is part of that estate sale process.

The Tim Hortons relationship is a key asset for Cold Stone. According to Tim Hortons' regulatory filings, there were 259 co-branded locations where the two franchises share space, including 149 in Canada and 110 in the U.S., as of Dec. 31. Most of those are Tim Hortons stores that have Cold Stone counters inside. However there are seven Cold Stone-branded locations that have Tim Hortons located inside.

Kahala founder and co-CEO Kevin Blackwell said the deal puts the firm on solid ground for expansion. "It is without doubt that Michael's expertise and experience in the franchising world will have a positive impact on Kahala and its future," Mr. Blackwell said. "The financial strength of the company has been significantly enhanced as part of this transaction."

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