7/3/2012 6:02 PM ET|
Why Burger King is no Big Mac
Private equity has sucked out the cash
The private equity crowd has flipped Burger King like a Whopper for a decade.
Along the way, they've loaded it with debt and sucked out huge amounts of cash -- money that could have instead gone to improve the company. That's the opposite of the McDonald's story, and it has left Burger King far behind.
Here's a brief history of how Burger King has been flipped on the private-equity griddle over the past decade:
Goldman Sachs (GS) and the private equity firms TGP and Bain Capital (famous for being co-founded by GOP presidential contender Mitt Romney) took control of Burger King in 2002. Four years later, they took it public, extracting a $448 million dividend in the process. Next, Burger King was taken private by 3G Capital in 2010. Now it's public again, though 3G Capital retains a 71% stake.
The upshot: In total, private equity has sucked $1 billion out of Burger King along the way, estimates Howard Penney, the managing director at Hedgeye, a stock research firm. "It's been a party for Wall Street," says Davidowitz. "The private equity guys have made a fortune." But like all parties, this one has come at a cost. "They've been jerking the company around, making a fortune. The problem is the company is a cadaver."
Davidowitz says that while much of Burger King's cash went to private equity fees over the years, McDonald's has used its cash to remodel restaurants, develop its menu and expand abroad. The contrast shows up in the numbers.
- Burger King sales fell 6.8% to $2.33 billion last year. And 2011 sales were lower than sales in both 2009 and 2008, as well. In contrast, McDonald's sales grew 12% last year, to $27 billion.
- Burger King has a return on equity, a common profitability measure, of 9.2%, compared with 38.2% at McDonalds.
- Burger King's market share has fallen to 12% from 17% over the past 10 years, while the share for McDonald's has risen to 50% from 42%, says Davidowitz.
"McDonald's has gotten to 50% market share because it is in the business of serving the customer," says Davidowitz. "Burger King has been in the business of serving private equity. As long as I have followed them, they have been starved for cash."
Sure, but that's history, and investing is all about the future, right? So what about the future?
Here, there are challenges, too, and you can blame the same culprits. Despite the protests of the spin-meisters for Romney, it really is a pretty common trick of private equity firms to load a company with debt to support their fees before taking it public as a stock.
A look at the filings shows this is exactly what happened at Burger King.
Before 3G Capital bought it in 2010, Burger King had $888.9 million in debt. Now it has debt of $3.12 billion. To put that in perspective, Burger King now has a debt-to-equity ratio (which compares debt to shareholder investments) of 280, compared with 87 at McDonald's.
And all that debt constrains what Burger King can do now.
- For one thing, by its own admission, it won't be offering shareholders a dividend any time soon. In contrast, McDonald's pays a 3.2% yield, which helps attract investors and support the stock.
- More important, the debt constrains Burger King in terms of growth prospects. It makes it tougher to remodel stores, develop original menu items or expand into emerging markets. "McDonald's has better resources to attack faster-growing markets," says David Abella, portfolio manager of the Rochdale Dividend & Income Fund (RIMHX), which gets a five star rating from Morningstar and counts McDonald's as its second-largest holding.
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Soembody needs to tell Burger King Worldwide about demographics ... The corporate executives need to do two things:
1) Clean the damned stores
2) Try to market the product to a more upscale clientele.
I know this is not gourmet food but I gotta tell you ... if you do a survey, the cleaner stores are probably the most profitable and productive stores. And can somebody tell me ... why I am telling BKW this and doing their job? Maybe BKW needs to start reducing the fat in the CORPORATE OFFICE.
Every Burger King I ever been in ... All to a Store ... WERE FILTHY ... the last one I went into, it was a Saturday around noon this time of year ... I was returning from my annual physical where I received news my blood cholesterol levels were all looking great ... so I figured what the hell. This store looked cleaner than any in my prior experience. Anyway, I ordered a BIG WHOPPER with cheese, the usual large COKE and FRIES. I sat down to eat my BURGER ... after a few bites I thought ... WOW this must be the best BURGER KING WHOPPER I ever had in my life ... I was about half way through the burger when I felt something on my tongue ... turned out to be a 12" red hair from one of the cooks. I took my tray with the burger to the manager. He apologized and offered to replace the burger ... NO THANKs ... NEVER HAVE RETURNED and NEVER WILL. Burger King Fries still suck ... but the COKE is generally acceptable.
There is no right or wrong here: to each his/her own, but I still prefer the flavor of the Burger King flame broiled burgers to the fried burgers at Mickey D's. I also like that Burger King has onion rings, and dip sauces. Last time I asked for a packet of mayo at McD's, they charged me an extra 30c. Also feel that the lettuce at Burger King is fresh, where it seems like the lettuce at McD's seems to be the prepackaged stuff, which I am not fond of.
That being said, I DO love the 'secret sauce' on the Big Mac. ("Burgerville" sauce is better, but More's the Pity for the rest of the country, it's only available in the Pacific NorthWest.)
I think we all understand that 'fast food' is high is fat, salt, and sugars, and not the best choice for every day eating.
But once in a while....that Whopper Jr w/ Cheeze is pretty danged yummy!!
Burger King had cini mini's and Big Kid Meals before Mc Donalds had mighty Kid meals and cinnamon melts. All fast food steal ideas from each other it's just the way it is.
McDonald's is the winner every time because they're a PR powerhouse, NOT because their food is generally better. (Give me a Whopper any day over a mushy, bready Big Mac.) The only thing worth eating on a McDonald's menu are the fries--easily the best of the bunch. Other than that, everything else at McDonald's just tastes like salt, salt, salt.
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