"I've been to this movie a few times." Such was the response of one prominent Burger King franchisee, when asked for his reaction to the $4 billion leveraged buyout that will take the country's No. 2 hamburger chain private for the second time in less than 10 years. In 2002, investment firms TPG Capital, Bain Capital and Goldman Sachs Capital Partners bought Burger King from Diageo, the U.K.-based spiritsmaker, for $1.5 billion. The company tapped the public markets in 2006, but now 3G Capital Management, a New York investment firm backed by prominent Brazilian business officials, has agreed to acquire the chain for $24 a share, a 46% premium on Burger King's Aug. 31 closing price.
To this skeptical franchisee, these ownership shuffles threaten to mask the more crucial issues facing the company: lousy sales (down 1.4% for the fiscal year ending on June 30), lousy profits (down 6.6% during that period) and lousy relations between the company and its franchisees (last November, local owners sued Burger King over its insistence that franchises sell double cheeseburgers for just $1). The franchisees claimed that the price was eating into profits. That suit is still in the court system: a few months later, the company relented and let franchises raise the double cheeseburger price to $1.29. "Burger King thought the value approach should be based solely on price," says the franchisee. "But value is based on so much more than price. It's based on quality, on convenience. If the direction of the brand doesn't change, it doesn't matter who the owner is. The customer doesn't care."
Analysts agree that Burger King needs an infusion. McDonald's has pounded the company during the recession. "The economic headwinds didn't seem to effect McDonald's all that much," says the franchisee. "The winners tell you how they won, while the losers make excuses." Burger King is hopeful that 3G's international experience could expand its global imprint. Brazilian billionaire Jorge Paulo Lemann, one of the fund's backers, helped engineer InBev's purchase of Anheuser-Busch. International growth, however, will remain a challenge. "There are about 3,600 McDonald's restaurants in Japan," says Mark Kalinowski, analyst at Janney Capital Markets. "Burger King has 33. You have to be realistic with expectations."
Steve West, an analyst at Stifel Nicolaus, says the new group should invest in Burger King's tracking technology. "Burger King don't know what consumers are doing day to day," says West. "It takes them too long to figure out habits and trends. That's a huge competitive disadvantage." According to West, the stores can use a makeover too. "Next to McDonald's, they look horrible," he says.
While McDonald's remains popular among kids and soccer moms, Burger King has targeted its products to men in the 18-25 age range, the so-called super fans who might find advertising featuring the Burger King mascot, colloquially known as "the Creepy King," amusing. Unfortunately for the company, the recession has punished that market segment. "If you push your chips into one category and fail," says the franchisee, "you're dead."
More-optimistic observers insist that even without a cash infusion from a new buyer, Burger King is far from finished. "I know I'm in the minority, but I'm bullish on the brand," says Tom Forte, an analyst at the Telsey Advisory Group. Forte points to the chain's recent off-the-bone ribs offering, which was priced at a premium compared to other products but still sold well, as evidence of the company's ability to innovate. Plus, going private could force the company to think long-term, rather than fret about quarterly sales targets.
A more robust uptick in the economy, say Burger King supporters, will ultimately lift the chain. But will that recovery ever come? "This 3G deal is a surprise, because if you had asked me a year ago if anyone would buy Burger King, I would have said no," says West. "Who is going to buy them? The valuation shows that this private equity firm is betting on a consumer rebound." It's one whopper of a gamble.