Hedge Fund 3G Capital Management is buying Burger King for $24-a-share. The total deal value including both debt and equity is $4 billion.
The price blows away what most investors had been expecting. After the Wall Street Journal broke the news on Wednesday that private equity was circling the hamburger chain, the company’s shares closed on the day at $15.58
Estimates of a purchase price from Wall Street analysts were also low.
UBS estimated a purchase price of $19 to $21. Deutsche Bank had it pegged at $19 to $20. Credit Suisse pooh-poohed the whole idea of a deal coming together, saying it “would be tough to justify” considering Burger King’s operations issues.
3G’s $24-a-share offer values Burger King at 9.2X Stifel Nicolaus’ estimated 2011 EBITDA.
That makes it pricier than arch-rival McDonald’s Corp, which is one of the best performing companies in the stock market with much healthier business prospects than Burger King. McDonald’s trades at 8.9X estimated 2011 EBITDA, according to Stifel.
Can 3G, a little known hedge fund with Brazilian financial backers, pull off such a pricey deal?
Well, it has a few things in its favor. Through 3G’s previous investments in Wendy’s and Carl’s Jr., it has been studying the fast food industry in the U.S., people familiar with the matter say. And with its investments in what is now Anheuser Busch-InBev, the backers of 3G have experience in consumer products and retail in the U.S.
3G is also not a typical buy out shop that will be looking to flip the company in a few years. That means the firm plans to be long-term investors in Burger King and will focus on expanding its international presence, people familiar with the matter said.
Still, as this WSJ article points out, Burger King faces complaints from customers and franchisees that it has neglected to update its menus (not enough salads) and it has a flawed pricing strategy, like its one dollar double cheeseburger.
3G is putting in about $400 million of equity into the deal, borrowing $2.8 billion, and refinancing about $800 million of existing debt.
Thus, 3G’s equity investment is not far from the $325 million than the PE investors, including TPG, Goldman and Bain, sunk into Burger King when they bought it in 2002.
And as Deal Journal calculated yesterday, those original investors netted a total of more than $2.5 billion in profits from a 2006 IPO, special dividends and today’s sale.
Call it the greatest hamburger flip in history.
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