020723 Buyout Artists Hungry For Burger KingJuly 10, 2002Suddenly, almost every top leveraged-buyout artist is hungry for Burger King, the perennially neglected chain now up for sale. Maybe it is finally time for this brand to sizzle. The home of the Whopper is about to get a new landlord, after 14 years of uninspired ownership by the British liquor barons at Diageo. Burger King, with 11,500 stores worldwide, which have gross annual sales of $11 billion, is likely to go to the highest bidder at a cost of $2 billion to $2.8 billion. Let the buyer beware. The U.S. is saturated with burger joints, and Burger King's franchisees are wobbling under heavy debt from wild expansion in the 1990s. The chain had to sell off struggling operations in Japan, Poland and Australia. Its sales overseas are only 23% of total revenue, compared with 50% at McDonald's. It will take time to overcome the years of neglect. From 1996 to 2001, customer visits to Burger King dropped 20%. Average sales per store fell from $1.1 million in 1996 to $980,000 last year, despite 4.7% annual growth in the fast-food industry. The chain's same-store sales fell 4% last year. AmeriKing, its biggest franchise operator with 373 restaurants, lost money in three of the past five years, and its same- store sales dropped 7% last year. All this strife adds up to a king-size opportunity for a turnaround. Some of the biggest names in leveraged buyouts have lined up to bid for the chain. They see early signs of restored growth, thanks to new management led by John Dasburg, the former CEO of Northwest Airlines, who arrived in April 2001. From August through December, the chain's same-store sales rose rather than fell. Such new items as the Chicken Whopper and the Back Porch Griller burger are a hit. Profit margins at stores are up a point or so through shrewd cost cuts: Basic beef patties were trimmed from 67 grams to 60, still well above McDonald's 47-gram slablet. The field of bidders has narrowed in recent months from 11 firms to a few supergroups. One team includes Thomas H. Lee Partners, Madison Dearborn Partners, Hicks Muse Tate & Furst and Blackstone. Another team, led by David Bonderman's Texas Pacific, includes Goldman Sachs and Bain Capital. Flying solo is Triarc, the parent of Arby's, run by the financiers Nelson Peltz and Peter May. Triarc stunned Wall Street by flipping Snapple in three years for a $480 million aftertax gain. All bidders are sworn to secrecy, bound by confidentiality agreements with Greenhill & Co., the investment bank running the auction. Bids were due July 2, and Diageo hopes to close a deal by late summer. Press leaks have the Texas Pacific team as the early favorite, with a bid of $2.3 billion, or seven times cash flow (earnings before interest, taxes, depreciation and amortization, pegged at $330 million this year). At that price, Mickey D's and Wendy's carry a 57% higher value than Burger King. Getting Burger King on the cheap is critical, given its poor operating history, but Diageo sniffs at such a low number. "We have a pretty strong range of bids, and I would be surprised if someone got it for that price," says Nick C. Rose, its CFO. An LBO firm will likely have to put up $600 million or so and borrow the rest. Franchisees don't want to see a new owner piled high with debt. The chain is still in need of growth capital. Dasburg persuaded Diageo to inject $350 million this year to pay for new kitchens, broilers and drive-throughs at the chain's 650 company-owned stores. That amount, 25% more than Burger King's capital budget in 2001, was the most the Brits have spent on Burger King in years. Franchisees want Dasburg's new management to stay, as do many of the buyout firms. He has closed underperforming stores, ended rampant discounting and helped franchisees restructure their debt. If Burger King keeps growing, the winner could float the chain to the public in three years for, say, $3.5 billion. Then again, a failure for the next buyer would be an opportunity for yet another one. If the Arby's guys--Peltz and May--drop out, we may see them yet again, says Michael Gallo, who follows Triarc for C.L. King. "What they buy are typically assets left for dead or not particularly sought after."
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