Burger King to be acquired in a $3.3-billion buyout
It’s not easy going up against McDonald’s, but someone wants to try -- again.
Burger King said Thursday that it has agreed to be acquired by investment firm 3G Capital Management for $3.3 billion. The hamburger chain has been public since 2006.
Burger chains appear to be a hot commodity in the mergers-and-acquisitions market. Apollo Management Group agreed to buy Carl’s Jr. and Hardee’s parent CKE Restaurants in February. Nelson Peltz, whose funds own about one-fourth of Wendy’s/Arby’s group, acknowledged in June that he was approached by an outside investor. Peltz’s Triarc Cos. bought Wendy’s and merged it with Arby’s less than three years ago.
It’s not that McDonald’s Corp. seems vulnerable -- the chain is stronger than ever, a runaway No. 1 in the fast-food business. But private-equity buyers are charged with identifying companies poised for growth, and there are a number of well-known brands aching for a turnaround.
Burger King may be the best example. The chain has reported declining sales since spring 2009.
R.J. Hottovy, a senior analyst with Morningstar, noted that quick-service restaurants have fallen out of favor as unemployment has risen. Stock prices also have dropped over the last year to 18 months, he said, “so I think valuations are attractive at this point for private-equity buyers.”
Hottovy added that fast-food chains are attractive to private equity because they generate free cash flow, which is helpful because the transactions to purchase them are often financed by debt. Another sweetener, he said, is that there are “some very experienced players in the retail and restaurant space who have a lot of capital just sitting on the shelves right now.”
The funds have to be put to use in the next year or so, “or it goes back to the lenders,” he said.
The restaurant industry is suffering as a whole and will probably remain weak for years to come. Sales and traffic declined industry-wide during 2009 for the first time in a generation. This week, the NPD Group reported that the restaurant industry is expected to grow only about 1% each year for the next decade, or slower than population growth.
Meantime, McDonald’s has reported 29 consecutive quarters of same-store sales gains. For the most recent quarter, McDonald’s saw global same-store sales rise 4.8%, while Burger King’s fell 0.7%.
“What we’re really seeing is a one-horse race where McDonald’s has not only a significant lead, but continues to succeed and perform in a way that everyone is envious,” said Darren Tristano, executive vice president of Technomic, a food-industry consultancy.
3G Capital declined to comment, and Burger King did not return calls. The fast-food chain can solicit competing bids until Oct. 12.
The proposed sale caps a tumultuous four-year stint for Burger King as a public company. Burger King has characterized itself in recent years with edgy marketing that sought out young, male “superfans,” who may patronize the category several times a week. While the efforts built buzz for the brand, it ultimately alienated just about everyone else, particularly women, minorities and senior citizens.
Media impressions have been a problem for Burger King. McDonald’s outspends Burger King in advertising by a margin of more than 3 to 1, according to the Nielsen Co. In 2009, McDonald’s spent $904 million, compared with Burger King’s $286 million, excluding digital media.
And while Burger King seemed to sew up credibility on big burgers such as the Triple Whopper, it has struggled to establish a meaningful stake in breakfast food or coffee. The chain also has been mired in a string of lawsuits with franchisees, primarily regarding value promotions and how payments are made to the advertising fund.
A sales slump can be particularly problematic for a chain or franchised restaurants because franchisees pay into a pool of funds based on a percentage of sales. If business is down, advertising investment will be too. And so the cycle can have a compounding effect.
Burger King’s market share has declined from 14.3% when it went public in 2006 to 13.9% in 2009.
The hamburger segment as a whole grew during that period, up 9% to $64.4 billion. McDonald’s, meanwhile, grew its share 2 full percentage points, to 48% of the category in 2009, or $30.9 billion.
Burger King has been through a variety of owners over the years.
Pillsbury bought Burger King in 1967, and Grand Metropolitan acquired Pillsbury in 1989. Grand Metropolitan merged with Guinness in 1997 to form Diageo, which sold Burger King to Texas Pacific Group, Bain Capital Partners and Goldman Sachs Partners in 2002.
