Burger King agrees to $4 billion buyout

Shares of the fast-food chain soar after 3G Capital says it will buy the company for $24 a share.

By TheStreet Staff Sep 2, 2010 11:57AM

TheStreetUpdated at 4:24 p.m. ET


By Miriam Reimer, TheStreet


Shares of Burger King Holdings (BKC) surged for the second day as the burger-and-fries chain agreed to be taken private by 3G Capital for $4 billion, with the assumption of the company's debt.


Burger King shares soared 25.1% to $23.59 today on nearly 31 times their average trading volume.


Burger King shareholders will receive $24 in cash per share, a 45.9% premium to Burger King's closing price Tuesday, before rumors of the buyout began circulating on Wall Street. It will be the second time in eight years that Burger King has taken itself private.


3G is led by Alexandre Behring, a former railroad executive who sat on the board of Jacksonville, Fla., company CSX (CSX). Behring spent a decade with Latin American private-equity firm GP Investments.

"We have great respect for the Burger King brand and the strong business that management, the employees and the franchisees have built," Behring said. "The iconic Burger King brand, its solid franchisee network and great product offerings make this a perfect fit for 3G Capital, which has a strong track record of long-term investments in global consumer brands and retail companies."


Burger King CEO and chairman John Chidsey is expected to remain in his post until the buyout is closed, after which Behring and Chidsey will be co-chairmen. Post continues after video:

The $24-per-share agreement bested the estimates of UBS (UBS) analysts, who expected Burger King to fetch between $19 and $22 per share. The firm also predicts that a string of private-equity takeovers of fast-food chains is likely to follow, given the strong performance of industry darlings McDonald's and Chipotle Mexican Grill (CMG).


Rumors of a private-equity buyout surfaced early Wednesday, leading Burger King shares sharply higher as investors bought up shares in anticipation of a possible merger.


Burger King has been facing serious issues lately, and analysts speculated Wednesday that a private-equity takeover could help the struggling fast-food chain turn itself around.


"It may be best for the (Burger King) concept to be out of the public eye for a while and allow the new management to concentrate on fixing its challenges," Janney Montgomery Scott analyst Mark Kalinowski said.

Burger King recently posted a better-than-expected fiscal-fourth-quarter profit of $49 million, or 36 cents per share, but the bottom-line figures were sharply lower than year-earlier results. Global comps fell 0.7%, with comps at U.S. and Canadian locations down 1.5%.


Kalinowski said Burger King's problems aren't necessarily unfixable as a public company but added that a private company is often able to do things it wouldn't be able to do if traded on an exchange. He argued that Burger King will have to heal its relations with its franchisees, relationships that have been strained for some time. It also must find a way not to be a McDonald's (MCD) clone.


"Burger King needs to figure out how to position itself more meaningfully away from McDonald's and still grow their business," he said.


As part of a turnaround plan, 3G plans to build Burger King's international footprint. The chain already has 93 restaurants in Brazil and expects to open about 500 locations in Latin America over the next five years.


At some point in 2008, 3G held a 6.7% stake in another struggling fast-food chain, Wendy's Arby's Group (WEN).


There have already been a number of restaurant stock takeovers in recent months. Notable among them: Mexican restaurant operator Rubio's was taken private by Mill Road Capital earlier this year for $8.70 per share. In July an affiliate of Apollo Management took CKE Restaurants private for $694 million. CKE owned Hardee's and Carl's Jr. fast-food chains.


"The right private owner might help one or more of these chains eventually become better, and likely smaller, competitors" to McDonald's, UBS wrote in a note to investors. The note tapped Sonic (SONC), Wendy's, Jack in the Box (JACK) and Chili's operator Brinker International (EAT) as other potential restaurant stocks that may be targets for private-equity buyouts.


Burger King, a public company since 2006, has been in the hands of private equity before. In 2002, a group led by TPG Capital, Bain Capital and Goldman Sachs (GS) Capital Partners bought Burger King for about $1.5 billion from Diageo (DEO). The firms still own nearly 32% of Burger King, and have significant representation on the board.


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