restaurants

What Would Make Burger King Open To A Sale?

Although Burger King Holdings Inc. has not confirmed, The Wall Street Journal this morning reported that the company has been in talks with private-equity firms about a possible sale, and The New York Times reported that BK is in "advanced" talks with private equity firm 3G Capital.

3G also has not confirmed, and at least one report, posted at Benzinga.com, has questioned 3G's ability to make such an acquisition on its own, given an October 2009 Barron's profile that put the firm's assets under management at that time at $50 million.

Burger King, which currently has market capitalization of about $2.3 billion, went public in 2006. However, it is 32%-owned by three private investment groups (TPG Capital LLC, Bain Capital LLC and Goldman Sachs Capital Partners) that bought the company for $1.5 billion from Diageo PLC in 2002, reported WSJ. These groups have significant representation on BK's board.

Why would the country's second-largest QSR explore a sale at this juncture? General marketplace and M&A conditions, as well as a company's assessment of its prospects, would likely come into play, according to restaurant industry and financial observers.

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The recessionary economy has taken a toll on BK's performance, particularly in relation to leader McDonald's. In late August, BK -- which currently operates more than 12,000 units in the U.S. and 76 other countries -- reported a fiscal 2010 Q4 comparable-store sales decline of 0.7% globally, including a 1.5% decline in the U.S. and Canada (although these were improvements over Q4 2009's losses of 2.4% globally and 4.5% in North America). Fourth-quarter diluted EPS was $0.36, compared with $0.43 in 2009's comparable quarter.

For the full fiscal year, BK reported a worldwide comparable sales decline of 2.3% (compared to positive 1.2% in 2009), a North American comp sales decline of 3.9% (compared to positive 0.4% in 2009), and diluted EPS of $1.36, versus $1.46 in 2009. All of this caused analysts to reduce their BK projections for the remainder of the year.

Meanwhile, McDonald's, with few exceptions, has continued to report monthly comparable-sales gains through the economic decline. For July, McDonald's reported a 7% increase in global comparable sales, including gains of 5.7% in the U.S., 5.3% in Europe and 10.1% in Asia/Pacific, the Middle East and Africa. For Q2 2010, the chain reported a global comp sales gain of 4.8%, including a gain of 3.7% in the U.S., and diluted EPS of $1.13 (up 15% versus the same period in 2009). During 2010's first six months, net income rose 12% and diluted EPS rose 15% to $2.13.

Year-to-date as of Aug. 31's market close, BK shares showed a loss of 13%, while McDonald's shares showed a gain of 17%, reported Reuters.

Speaking in general marketplace terms, Dennis Lombardi, EVP, foodservice strategies for retail/foodservice industry consulting firm WD Partners, points out that after a hiatus of about 18 to 20 months, private-equity activity has picked up significantly. (Last month showed the highest-value level of PE M&A deals since August 1999, according to Reuters.) Some PE firms that have held onto foodservice properties are exploring sales to create liquidity events, while others -- given that prices now reflect lower multiples than three to four years ago -- are exploring acquisitions, Lombardi notes.

This environment will continue to encourage a growing number of restaurant chains/foodservice companies to "test the waters" to see if they can get attractive valuations from prospective acquirers, Lombardi says. "If not, a company can always decide not to sell," he adds.

California Pizza Kitchen and Benihana are among the chains that have been seeking buyers (although the New York Post reported that CPK ceased negotiations with American Securities Capital last month).

Beyond general capital/M&A conditions, a company's assessment of whether its enterprise value is likely to improve materially over the next 12 to 18 months is generally a critical factor in weighing a sale decision, points out Lombardi.

Is Burger King likely to be anticipating much enterprise value growth in coming months? Lombardi says he considers this unlikely, given that, in his view, neither the overall prospects for the restaurant industry nor McDonald's' performance trends are likely to change substantially in the foreseeable future.

"I'm not looking for any major uptick in restaurant sales soon -- at this point, consumers have pretty much told us that they're going to continue to be very cautious about spending disposable income until they feel better about the economy and their own economic security," Lombardi says. He adds that the financial insecurity of so many older Boomers and general dining-out cutbacks point to about 1% annual restaurant industry sales growth in the years ahead, driven more or less entirely by population growth.

How might a private equity acquisition of Burger King affect the overall QSR marketplace? At least in the short term, changes in QSR ownership or capital funding structure generally have little effect on the consumer's experience at store level, says Lombardi. "However, in the longer term, after any sale occurs, it's always possible that a new board might decide to introduce a new management team or make other changes, such as repositioning the brand or reassessing geographic growth strategy," he notes.

The reports of BK sale talks caused an immediate upsurge in the company's stock price. Some analysts were quoted as viewing a sale as an opportunity for BK to differentiate itself to compete more effectively with McDonald's.

3G Capital, which has offices in St. Louis and Toronto, last year disclosed that it owned about 1% of Wendy's/Arby's shares, although its most recent June 2010 holdings disclosure did not show any ownership of Wendy's/Arby's shares, Bloomberg.com reported.

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