Reheating Burger King won’t be another LBO whopper

September 1, 2010

It’s easy to see why private equity firms might salivate at the prospect of another bite at Burger King. The fast-food chain has made a fortune for a trio of buyout barons who acquired the company in 2002 and flipped it onto public markets four years later. But Burger King won’t be another LBO whopper.

Back then, nobody wanted Burger King. The business was in the hands of Diageo, the booze behemoth desperate to divest itself of any assets that couldn’t be consumed at a cocktail party. Not only did it have to cut the price from $2.3 billion to $1.5 billion, it guaranteed all the buyout’s debt at advantageous rates.

Diageo’s backing allowed TPG, Bain and Goldman Sachs to buy Burger King with just a sliver of equity — only 14 percent of the purchase price, or $210 million. Though they’ve since sold off chunks of their stake and harvested dividends from Burger King, they are still sitting on stock worth nearly four times the entire original investment.

Flash forward to the new and improved Burger King. With talk of a buyout spicing up the shares, plus about $1.8 billion of net debt, the company now sports an enterprise value of around $4.3 billion. That suggests a valuation of at least 9.5 times JPMorgan’s 2011 estimate for earnings before interest, tax, depreciation and amortization.

By contrast, the TPG-led crew paid just a little over five times Burger King’s 2002 EBITDA, according to the prospectus for its 2006 initial public offering. Moreover, without the backing of a sugar daddy like Diageo behind the debt, a new owner would need to inject at least twice as much equity as TPG, Bain and Goldman did.

That makes the next bite of Burger King look gristly. Sure, further expansion abroad remains an option if the international success of McDonald’s is anything to go by. And a revamped menu might help sales. But most of the costs have already been picked through and revenue growth from consumers eating cheap food in the weak economy has started to level off. Today’s Burger King just isn’t the value meal on which TPG, Bain and Goldman have already feasted.

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