BK Buyers Get It Their Way –

Much like opting for a Whopper at a Whopper Jr. price, the consortium of Texas Pacific Group, Bain Capital and Goldman Sachs Capital Partners managed to shave a third off its originally agreed upon $2.26 billion offer for Diageo’s Burger King. After nearly two months of renegotiating, the final price for the burger chain came in at $1.5 billion. The deal closed December 13.

The buying group originally agreed to acquire the company July 25 for $2.26 billion. However, due to a sharp downturn in the fast-food-burger market, largely blamed on increased competition within the sector, the consortium reevaluated its offer and decided to walk away from the original agreement. The new purchase-price multiple rests at approximately five times EBITDA, versus the earlier sum of seven times EBITDA.

No Shirt, No Shoes, No Earnings … And No Financing

While the battle of the value menu has been blamed for the industry’s woes, there has been evidence that consumers are increasingly choosing other fast-food options over the standard hamburger offerings. Market research firm Mintel notes, “With increased choices in all aspects of life consumers are now more demanding in their eating-out experience.” Mintel says that while offerings outside of hamburgers make up only 10% of the fast-food market, these “other” sandwiches are growing twice as fast.

Whatever the reason, the burger slump has hampered the entire industry. This was evidenced earlier in December, when Burger King’s second largest franchise AmeriKing, filed for Chapter 11. (That was not a surprise, though, to the negotiating parties.) Other signs of weakness can be seen in Burger King’s competition. McDonald’s took a beating on the stock market in December, after the company warned that, including charges, it would post its first-ever loss in 47 years. Wendy’s also changed its forecast in December, trimming its full-year earnings outlook amid the competitive environment. In the course of the industry slump, Burger King expects that its second-half operating profit, for the six months ending in December 2002, will be 20% below 2001’s corresponding period.

Given the environment, the bankers who were tapped to finance the deal, J.P. Morgan Chase & Co. and Salomon Smith Barney, insisted that the price be lowered. Benjamin Hirst, an executive vice president at the hamburger chain, confirmed in a news report, “[Burger King] met every target and test laid out in the [original] sales contract. But the banks financing the transaction had a market mac’ a market-based material adverse change clause.”

Under the revised agreement, the $1.5 billion purchase price will be made up of $1.2 billion in cash, $86 million in assumed debt, and $215.5 million in subordinated debt. The final purchase price was at the low end of most analyst estimates.

Extra Ketchup, Please

In addition to trimming the actual purchase price, Diageo took on some additional terms in order to push the deal through. While the company didn’t have to retain a minority interest in Burger King, as had previously been speculated, Diageo did have to guarantee $750 million in senior loans and $100 million in revolving credit. Additionally, the company agreed to provide $212.5 million of subordinated debt, which was matched by the buying group.

“We are pleased that we have been able to reach this agreement despite a difficult market and at a time of tough trading conditions for the quick service restaurant sector,” said Diageo Chief Executive Paul Walsh. “We continued to review our options but concluded that this transaction with this buying group was the most certain route to achieving separation.” Representative firms from the buying group declined comment.

Howard Penney, an analyst at SunTrust Robinson Humphrey, told Buyouts, “The industry is very competitive these days, it’s acting somewhat irrationally.” He said he expects companies in the sector to increase their focus on quality, as something has to be done to turn things around.

An observer in the buyouts industry said the deal appears to be a good one for the buyers. “It clearly demonstrates why discipline is so important in this industry,” he said, adding that while Burger King may have some issues, it is in a traditional sector and can generate cash and pay down debt.

Since the purchase, the buying group has already started to work on turning the burger chain around, naming Bradley D. Blum as the new chief executive officer of the company. Blum, former chief executive officer of Olive Garden, will officially don the paper crown Jan. 6.