REFILE-UPDATE 3-Burger King's return to NYSE too fast to swallow

Wed Apr 4, 2012 7:18pm EDT

By Lisa Baertlein

April 4 (Reuters) - Burger King's plan for a quick return as a publicly traded company is leaving some investors cold.

Private equity group 3G Capital - which took Burger King private in October 2010 - plans to merge the third-largest U.S. hamburger chain into Justice Holdings, a UK investment firm co-founded by hedge fund veteran William Ackman.

The $1.4 billion cash deal is expected to close in two to three months, with shares in the merged companies then debuting on the New York Stock Exchange.

Analysts said 18 months isn't enough time to turn around operations at Burger King, which recently ceded its rank as the No. 2 U.S. hamburger chain to rival Wendy's Co and trails fast-food leader McDonald's Corp by a wide margin.

The chain, known for its Whopper hamburgers, traditionally has targeted young male customers, while Wendy's and McDonald's have catered to a broader market, including moms, children and senior citizens.

In addition, before the $3.26 billion sale to 3G, Burger King restaurants suffered from a lack of investment, and relations with franchisees were rocky.

"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," Morningstar analyst R.J. Hottovy said, referring to Burger King's operating margins and sales at established restaurants.

Justice, a shell company that went public in February 2011, said on Tuesday it expected the fast-food chain's core profits in 2012 to almost double from 2010.

3G has been slashing Burger King's costs, selling restaurants to franchisees, renovating units and revamping menus with items like salads and high-margin beverages such as smoothies to better compete with McDonald's and Wendy's.

Analysts said the menu changes seemed more of a defensive play than proof that Burger King's owners are coming up with new ideas.

"It's more of a situation of just keeping pace with rivals rather than true innovation," Hottovy said.

Founded in 1954, Burger King has more than 12,500 locations around the world.

Ackman on Wednesday had the job of selling the hamburger chain's growth potential to analysts and investors.

He said Burger King's North American average unit sales of $1.15 million trail the $1.46 million figure at Wendy's. He also admitted to an "enormous gap" with McDonald's average unit sales of $2.43 million.

"We believe we're buying the business at the bottom in terms of restaurant volumes," said Ackman.

"It's not particularly heroic to get to where Wendy's is today and we've got McDonald's proving what can be done if it's done right," he said.

Ackman also said that Burger King's same-restaurant sales, which were "falling off a cliff" at the time of the 3G acquisition, had turned a corner and were up in January, February and March of this year.

Howard Penney, restaurant analyst at Hedgeye Risk Management, wasn't biting. He said he'd be more convinced if Burger King was boasting about a year of improved performance.

"For them to get their volumes up, they need to take share from the two bigger chains. (McDonald's and Wendy's) are not going to let that happen; they're not going to roll over," Penney said.

He noted that Ackman's track record would be a bigger draw for investors than the performance of Burger King.

3G will retain a 71 percent stake after the merged company is listed. Ackman and Pershing Square Capital Management, the $10 billion hedge fund he runs, will keep a stake of just over 10 percent.

About 4 percent will belong to Justice co-founders German-American billionaire investor Nicolas Berggruen and Martin Franklin, who founded consumer products company Jarden Corp.

Fifteen percent of the company will be available for sale to investors, Ackman said.

"It's something approaching a billion-dollar float. It's not a tiny company; it's going to be a legitimate company," Ackman said.

Ackman valued Burger King at $17 to $18 a share. 3G had bought the company for $24 a share, but it was not clear if share counts would be comparable.

The proposed transaction was unanimously approved by the boards of directors of both companies. Closing is expected in 60 to 90 days, subject to regulatory approval, at which time shares will be free to trade in New York.

Justice shares were immediately suspended after the deal was announced late on Tuesday.