Whopper of a Deal?

The Wall Street Journal reported today that Burger King Holdings, Inc. has agreed to a leveraged buyout.  This is a $3.3 billion deal by the private equity firm 3G Capital Management.

Because of my limited business background, I had to review the meaning of a "leveraged buyout."  BusinessDictionary.com defines a leveraged buyout as "acquisition of a firm by raising its purchase price mainly through borrowing secured by the same firm's assets...after the purchase, the loan is paid from the firm's cash flow and/or by selling off its assets."  The Wall Street Journal further describes that 3G has debt financing almost $2.8 billion from JP Morgan Chase & Co and Barclays Capital, describing this deal as "highly leveraged."  It is also noted that Moody's Investors and Standard & Poor have placed Burger King's debt rating under review, thus reflecting for me the potential risk in this buyout.

Interestingly, 3G Capital Management is a company primarily backed by Brazilian businessman (one a former surfer and Wimbledon tennis star).  The company has had holdings in several fast food chains including Wendy's, Jack in the Box and in Anheuser-Busch InBev.  Burger King would be the company's first acquisition and would take the Burger King brand private once again.

Relevant to this week's classroom discussion, it appears that Burger King may be suffering from lack of effective marketing.  In Thursday's Wall Street Journal, it was reported that franchisees were displeased with Burger King Holdings, Inc. for "scant menu development...focusing on so-called super fans" or a narrow range of potential customers.  In contrast, McDonald's has an "expansive menu" that appeals to a broad base of consumers.  Analysts and franchisees point to revenue and net income differences.  In the last quarter, "McDonald's revenue rose 5% and its net income was up 12%, while Burger King's latest quarterly revenue fell 1% and its profit was down almost 17%."  It appears that Burger King needs to create more "want" for its products and more effectively identify potential customers if it is to remain competitive in this industry.

Also interesting to me is the anticipated strategy of 3G to accomplish a more competitive firm.  Apparently only 35% of McDonald's revenue is generated in the United States and Canada, compared with 69% of Burger King's revenue.  Thus, 3G plans to expand the Burger King brand internationally, in particular to South America, which it seems naturally poised to do.  The accompanying editorials seemed to identify this as a lucrative deal for 3G, that will most likely be completed late this year.


Sources:
1.  The Wall Street Journal, Thursday September 2 and Friday September 3, 2010.
2.  www.BusinessDictionary.com