|Pe deals of the year|
When TPG Capital, Bain Capital LLC and Goldman, Sachs & Co. acquired Burger King Holdings Inc. in 2002 from Diageo plc for $1.5 billion in a leveraged buyout, they took on the challenge of revitalizing an ailing food chain. Despite its pre-eminent position as the second largest globally, Burger King languished under Diageo, becoming in effect a noncore business.
Its sponsor-led turnaround resulted in strong growth, though the recession took its toll. Still, the Miami chain commanded a steep price -- 9 times Ebitda -- when 3G Capital Partners Ltd. offered to buy it in October. Each of the sponsors still held a 10% stake in the fast-food operator when 3G wrapped up its $4.3 billion takeout. All told, the sellers made 5 times their $625 million equity, including dividends.
3G's bid, a landmark deal for Brazilian investors with global aspirations, was also notable for the dual proxy-tender offer structure it used to ensure completion. The tender offer was initiated at the same time a proxy statement was filed with the Securities and Exchange Commission. But the tender offer pushed through, facilitating completion in about six weeks.
Back in 2002, Burger King was plagued with management turnover and declining average restaurant sales. The number of U.S. franchises was shrinking, and many were distressed. Menus and marketing strategies didn't click with customers. Relationships with franchisees were strained, and numerous outlets had poor service.
Diageo was in fact forced to accept a lower price of $1.5 billion, or about 5 times Ebitda, than the initial $2.26 billion the buyers offered. And it guaranteed $750 million in financing. TPG invested about $225 million, while Bain and Goldman each invested about $200 million in equity.
Soon after, the chain beefed up the management team, though it went through two CEOs in two years before John Chidsey, a former Cendant Corp. and PepsiCo Inc. executive, joined in March 2004.
BK cooked up an aggressive scheme to boost sales and profitability. It strengthened relationships with franchisees and bolstered advertising campaigns focused on core customers. It launched a new, cheaper restaurant model and refurbished menus.
Within the first year, Burger King's Ebitda rose to $259.2 million on $2.05 billion of revenue, from $225 million Ebitda on $1.94 billion of revenue the prior period. BK's robust growth allowed the sponsors to take cash dividends and led to an oversubscribed initial public offering in May 2006 that raised $425 million in proceeds. The IPO valued the enterprise at $3.6 billion, or 14 times Ebitda.
Ebitda had grown to $444.6 million in fiscal year 2010, ended June 30, from $283 million pre-LBO, while revenue reached $2.5 billion, from $1.65 billion pre-LBO. Recession slowed momentum, though. Outlets expanded to nearly 12,300 in 2010, from 11,000 in 2002, but that still lagged behind McDonald's Corp.'s 32,000 globally.
Right before the company was acquired by 3G, BK's stock hovered around $16, near a five-year low of $13.05 in 2006. Despite a brief recovery, shares continued to sink.
By then BK had drawn 3G's attention as a buyout target. 3G has had a long history in the global food and beverage industry. It owns a stake in Coca-Cola Enterprises Inc. One of its founders, Brazilian billionaire investor Jorge Paulo Lemann, helped orchestrate the merger of Brazil's AmBev with Belgium's Interbrew in 2004, creating InBev SA/NV, which in turn combined with Anheuser-Busch Cos. Lemann sits on Anheuser-Busch InBev NV's board and is also a shareholder.
Lemann founded 3G with Brazilian partners Marcel Telles, former CEO of AmBev, and Carlos Alberto Sicupira, former CEO of Brazilian retailer Lojas Americanas SA. The firm, with offices in New York and Rio de Janeiro, has a hedge fund-like mandate and makes passive investments in public companies' stock.
However, its buyout of BK was unusual in most respects. The firm chose to deploy its entire $1.6 billion special situations Fund II as equity in the transaction, with $2.6 billion in debt financing. 3G partners Bernardo Hees and Daniel Schwartz have joined as CEO and CFO, respectively, in what they describe as permanent management positions. A third partner, Alexandre Behring, is now co-chairman along with Chidsey.
3G will have its work cut out for it. Burger King's revenues have been slipping in recent quarters. But the principals at the helm seek to fix that with ambitious expansion plans both here and abroad. The chain on June 15 said Vinci Partners Investimentos Ltda., a Brazilian investment firm, will become the master franchisee in Brazil; Vinci aims to increase the operator's 108 restaurants to as many as 1,000 over the next five years.
"We believe the company has a strong business model," Schwartz says, and "we see enormous opportunities to grow the brand for the long term."