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