BKW: Will the Whopper Make a Comeback?

Article by Investment U

With all the hoopla surrounding Mr. Zuckerberg and the Facebook IPO in the spring, other companies going public were overlooked.

You’d think a brand name like Burger King (NYSE: BKW) would garner some more attention than it did. However, its return to public trading and its background is a little peculiar. But its June 20 IPO passed with very little hoopla. Here’s why:

Back in early April, Burger King Worldwide Holdings Inc. (NYSE: BKC) announced it would go public again. The fast food chain was just taken private in 2010 by New York investment firm 3G Capital Inc. Here are the terms of the deal…

3G will get $1.4 billion in cash to transfer Burger King to special-purpose acquisition company (SPAC) Justice Holdings Ltd.

Justice Holdings will get a 29% piece of Burger King, which gives the third-largest burger joint an equity value of about $4.8 billion. This doesn’t seem like your run-of-the-mill initial public offering – and that’s because it’s not.

Let’s look at some of the deal’s peculiarities:

1. What’s a special-purpose acquisition company? Well, it’s a publicly traded buyout company that raises money so it can buy a desired existing company. SPACs raise pools of cash for the possibility of a future merger. Most of the time, the SPAC is looking to deal in a specific industry. For this reason, many refer to these types of deals as a reverse IPO. The money is raised first just for the sake of going public. After that’s done, then they worry about a company to buy.
2. Wasn’t the company just taken private two years ago? 3G Capital Inc. paid $3.3 billion for Burger King about 20 months ago. It’s still the biggest restaurant takeover in the last 10 years.

Trying to Be More Competitive

Right before they announced they were going public again, Burger King introduced its new menu. Now stores offer all types of new foods like salads, smoothies and chicken snack wraps.

Then BKW got rid of its long-running – sometimes disturbing – King mascot last year in an attempt to appeal to a wider spectrum of consumers. Apparently marketing found that a mute King with a permanent creepy smile just doesn’t appeal to women and children…

And finally, BKW tried to remodel their stores to a so-called 20/20 redesign model that gives them a more industrial and contemporary look.

So, is there any indication that the changes made a difference?

Well the jury is still out…

The Vital Points to Consider:

Last Year’s Numbers

Burger King reported to the SEC net income of $107 million on revenue of $2.34 billion. What’s really not good is its seven consecutive quarters of negative comparable sales in the United States and Canada. Sales at restaurants that were open for at least 13 months dropped .5%.

An Increase in Debt

When 3G Capital took Burger King private in October 2010, it had an equity valuation of $3.3 billion and about $700 million in debt. As of the June 20 public offering, the equity valuation is $5.1 billion and total debt is $3.1 billion. Debt has increased by four times in 20 months with little to show for it. It’s of note that many of these private companies will use takeovers as an ATM machine. They takeover the company and rack up a bunch of debt and then reintroduce them to the public.

3G Capital claims that the new debt went into improving Burger King’s operations and competitive positioning. But can you really say that a period of less than two years is a plausible length of time to turn around a company? And where are the vast improvements? Morningstar commented: “This is a pretty quick turnaround to be going public again, especially when a lot of their fundamentals still seem to be lagging a number of their competitors.” Caveat Emptor!

Competitiveness in the Industry

Here are four major points that put BKW at a competitive disadvantage:

1. Burger King has about 12,512 restaurants, but for years, it struggled against sector leader McDonald’s (NYSE: MCD). To make matters worse, Wendy’s (Nasdaq: WEN) recently took the No. 2 spot in fast-food burger joints. We haven’t even discussed the infringements that companies like Panera Bread (Nasdaq: PNRA) and Chipotle (NYSE: CMG) made on the burger world.
2. Even with its new menu, Burger King isn’t innovative in the fast food industry. It’s attempting to keep pace with McDonald’s, which already has similar items on its menu.
3. More than half of Burger King’s restaurants are located in three states: Florida, North Carolina and Indiana. If it hopes to ever get back in the game against old and new rivals, it’s going to have to venture out, not just internationally, but also domestically.
4. As far as the economy is concerned, things won’t be looking that rosy for the industry. A lack of job creation coupled with economic uncertainty could have an adverse affect on the industry. Input costs like wheat and corn are presently expensive and creeping upwards even more. McDonald’s is strong enough to weather these storms. The jury is still out on Burger King

The Bottom Line

Should you own this stock going forward? Well, the truth is, no one is sure change is around the corner. Attempts at change have been going on for years with nothing to show for it.

If your mind is set on owning a stock for the long haul in the traditional fast food industry, I don’t think BKW is the one right now.

Good Investing,

Jason Jenkins

Article by Investment U