Debt on the Menu at Burger King

Burger King Holdings Inc agreed to sell itself to investment firm 3G Capital for $3.26 billion.

Image: REUTERS/Kevin Lamarque

Here's something for Burger King Franchisees to consider as the restaurant chain is sold to yet another private equity owner. Who will pay for the $2.8 billion in bank loans that are financing the buyout, worth an estimated $4 billion, including debt and equity?

3G Capital, a heretofore obscure investment company with holdings in CSX and Coca-Cola Bottling, is offering $3.26 billion for the company, a 46 percent premium to its pre-announcement market price. The new owners are taking on Burger King's existing debt, bringing the total cost of the deal to $4 billion. About $2.8 billion will be financed with bank loans. 3G is run by Brazilian billionaire Jorge Paulo Lemann, a veteran of private equity firm GP Investments, America Latina Logistica, and Anheuser-Busch, where he has a seat on the board.

Burger King has been fried by the recession. It has gone through a series of ownership changes since 2002, when private equity players TPG, Goldman Sachs and Bain bought the company from British booze giant Diageo.

It went public in 2006, although the private equity group still holds nearly one third of the shares.

Those three private equity companies—regarded as among the best in the business—have failed to prevent a decline at Burger King. The recession has hit its core customers, who are in their late teens to early 30s. Revenues are down about 1 percent, while McDonald's has a broader menu, double digit revenue growth, and a market cap of $80 billion.

Burger King is in need of new technology, a facelift for its aging stores, and probably an overhaul of its menu and general strategy. Its marketing campaign—featuring a bizarre-looking character—probably hasn't helped, either. Needless to say, relations with franchisees could be better.

It's not clear what 3G will bring to the table, so to speak. It once had minor holdings in Wendy's and Jack in the Box, but that's not the same thing as financial control, let alone operating responsibility.

What is clear, is that that debt is on the rise. It appears that less than $500 million of equity will go into the deal. That's less than 20 percent of the purchase price, and about 12.5 percent of the value of the deal, including the assumption of existing debt. The economy remains weak. Any turnaround will require investment in the business.

Debt is cheap right now, and if the new owners can raise enough, they stand to make a profit by acquiring the company now, when equity values and interest rates are low.

But they need a great strategy to turn around sales and position the company for an upturn in the economy. That isn't clear. What is clear is that the restaurants will have to support a higher level of debt.