Private Equity Has A Hankering For Fast Food

By Stephen D. Simpson, CFA | September 03, 2010 AAA

The long, strange story of Burger King (NYSE:BKC) is soon to take another twist. The world's #2 hamburger chain announced Thursday morning that it had accepted a long-rumored bid from 3G Capital that will give current Burger King shareholders $24 in cash per share.

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What a Long, Strange Trip it has Been
For a large international restaurant chain, Burger King has had some ups and downs on the ownership front. The company was privately-owned for about eight years before Pillsbury bought it. Pillsbury had difficulty running the company and it became part of Grand Metropolitan (now Diageo (NYSE:DEO)) in 1989, when Grand Metropolitan bought Pillsbury.

Diageo built on Pillsbury's legacy of poor management with even more poor management, but decided to sell the chain at the turn of the century. A group of three well-known investors (a unit of Goldman Sachs (NYSE:GS), Bain Capital, and TPG Capital) bought the company, actually ran it reasonably well by prior standards and then took the company public in 2006.

Unfortunately, shareholders who bought around the time of the IPO and held on really did not have much to show for it until the bid was announced. Prior to this deal, the stock had basically gone nowhere in over four years - better than the S&P and certainly better than Wendy's/Arby's Group (NYSE:WEN), but well short of McDonalds (NYSE:MCD) and YUM! Brands (NYSE:YUM).

The New Owner
This is an interesting move for 3G Capital. This investment management firm has not been a big player in private equity before, and has instead generally focused on large concentrated equity positions. In its latest 13F filing, for instance, the company held sizable positions in railroads CSX (NYSE:CSX) and Norfolk Southern (NYSE:NSC), along with Coca-Cola Enterprises (NYSE:CCE), Bank of America (NYSE:BAC) and about eight other names. It will be interesting to see, then, whether this long-languishing chain does better under this new owner, and whether this experience is just the start of more activity in private equity for 3G Capital.

What Does This Say About the Industry?
Investors probably should not view the acquisition of Burger King as the beginning of some sort of acquisition-fueled gold rush in the restaurant space. For reasons that do not make a lot of obvious sense, the restaurant sector does attract more than its share of interest from private buyers, so a deal here or there is not any kind of trend.

That is not to say that there are not other concepts that could attract a bid. Jack in the Box (Nasdaq:JACK) and Sonic (Nasdaq:SONC) could appeal to ambitious buyers who believe they could catapult these "super-regional" chains into national players. Likewise, struggling chains like McCormick & Schmick's (Nasdaq:MSSR) could draw the attention of a turnaround specialist willing to wait out these tough times for the sector.

The Bottom Line
Burger King's buyout goes to show that there just are not a lot of obvious rules about trying to predict buyout candidates. Maybe Burger King stock was a little undervalued, and there are certainly people who believe that Burger King could produce a lot more value with better management, but those broad criteria could apply to hundreds of other companies. All of that being said, at least shareholders get a reasonably happy ending to this story. (Though these two jobs are perceived as being opposites, the compensation can be quite comparable. For further reading, see Compensation Myths: Burger Flipper Vs. Investment Banker.)

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