Burger King Delivers A Whopper Of A Quarter

By Will Ashworth | August 06, 2012 AAA
The latest publicly traded incarnation of the Whopper announced second quarter earnings August 1 and they were tasty indeed. Burger King (NYSE:BKW) started trading on the New York Exchange June 20, the third time it's been public since 2002. Each time it's gone public, its private equity owners have made out quite nicely. Perhaps this time regular investors can benefit too?

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3G Capital acquired Miami-based Burger King on Oct. 19, 2010, for $4 billion, including debt. The plan to revitalize BK included a complete makeover of its image and stores, the introduction of a new breakfast menu, home delivery and the audacious goal of opening 1,000 locations in China. At the time, it was the biggest restaurant deal in more than a decade. 3G's principals are four of the wealthiest men in Brazil, controlling 41% of Anheuser-Busch InBev (NYSE:BUD) with its Belgium partners.

SEE: Top 6 Brazilian Billionaires

Burger King's ambitious plan certainly wouldn't fail because of a lack of money. Their combined net worth is easily over $20 billion. So why go public now when the IPO market is anything but a sure thing? They had an alternative plan. U.K.-based Justice Holdings purchased a 29% minority stake in Burger King Worldwide for $1.4 billion. It then ceased trading on the London Stock Exchange and re-listed on the NYSE, avoiding a lengthy and drawn-out affair.

Burger King's second quarter results were outstanding. Starting with the top-line, same-store sales grew 4.4% year-over-year, its second consecutive quarter with positive system-wide comps. Adjusted EBITDA grew 19% in the second quarter to $172 million, adjusted net income up 32% and adjusted diluted earnings per share up 29%. In terms of adjusted EBITDA margin, they improved 700 basis points to 32%. In the 18 months since December 2010, Burger King's seen its latest 12-month adjusted EBITDA increase by 74% to $558 million. Burger King's management is definitely working some magic.

SEE: A Clear Look At EBITDA

Two of its main goals are well on their way to completion. First, the company wants to turn all of its restaurants over to franchisees. At the end of December, 90% were franchised. Ninety-four percent of its restaurants were franchised by the end of June and the company hopes that 100% will be franchised by the end of 2014.

Secondly, in an effort to grow abroad, it's reached joint venture agreements in both Russia and China that will add approximately 1,500 restaurants in those two countries alone. Unlike Yum Brands! (NYSE:YUM), where a majority of its Chinese units are company-owned, Burger King's will be exclusively owned by franchisees, providing a significant reduction in capital expenditures.

SEE: Is Buying A Franchise Wise?

The Bottom Line
Burger King's current enterprise value is $8 billion; 3G paid $4 billion. It's doubled its money. Most private equity firms would get while the getting's good. However, 3G isn't your ordinary investment company. The founders, as best I can tell, are patient investors. They're not quick-buck artists like Bain Capital. I see them sticking around until the U.S. and Canadian units are operating more efficiently and its international expansion is further down the road. Since it's less than two years into buying Burger King, I look for them to ride this out until sometime in 2015. When it does sell, I can assure you that it will be looking for more than double its money.

At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.

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