BK Buyers Look To Change Their Order –

The recent performance of Burger King has left its proposed buyers asking, “Where’s the beef?” The buying group, comprised of Texas Pacific Group, Bain Capital and Goldman Sachs Capital Partners, is likely to change the terms of the deal in light of the fast-food chain’s recent decline.

A statement issued by Diageo, which is selling the burger chain, indicated that the current conditions in Burger King’s markets and “the buying group’s judgement of their potential effects under the agreement” has led the consortium to reconsider possible revisions to the terms of the purchase. The release specifically mentioned the possible impact to the buying group’s financing arrangement as a particular concern.

Burger King’s finanical performance has suffered ever since BK launched its “value menu” this past fall, a move that was quickly countered by McDonald’s. McDonald’s then upped the stakes when it offered two full-sized premium burgers on its value menu, creating a price war that Burger King did not want to enter. Neither company has had much success with the effort. John Glass, a restaurant analyst at CIBC World Markets, referred to the value menu as “the greens fees of the industry,” though, and that in order to compete in the sector, companies need to have one.

The fast-food burger industry as a whole has been slumping recently. In September, Diageo reported that Burger King’s operating profits had fallen 18% in 2001 to $245 million, while its operating margin dropped to 14.2%, representing a decline of 2.8 percentage points. Meanwhile, McDonald’s recently announced a restructuring initiative, with plans to eliminate jobs and cut back on the number of restaurants it opens in 2003. Wendy’s is also not immune to the sector’s plight, as it reported a smaller-than-expected jump in its same-store sales for the month of October, with the usual suspect – industry discounting – to blame.

The consortium of Texas Pacific Group, Bain Capital and GS Capital Partners originally won the bidding for Burger King with its $2.26 billion offer in July, carrying a purchase-price multiple of 7.29 times EBITDA. Of that total, $1.6 billion was to come from debt, with $500 million of that raised through the sale of high-yield bonds. (Reportedly, Triac Cos., Thomas H. Lee Partners, Blackstone Group and Madison Dearborn also expressed an interest for the company.)

J.P. Morgan Chase and Schroder Salomon Smith Barney, co-heads of the banking syndicate for the deal, have reportedly had trouble in their efforts to secure the financing, which supposedly needs to be in place by the end of 2002. Some suggest the purchase could be cut to as low as $2.1 billion, and other reports indicate Diageo may consider retaining an equity stake in the fast-food chain. None of the buyout firms involved would comment on the negotiations, nor would Diageo either confirm or deny rumors that it could hold onto an equity stake.

In a note to clients, Merrill Lynch expressed optimism that the deal would indeed get done, saying, “We remain confident that the sale of BK will complete but clearly there is now confirmation that there is a strong chance of a downward revision to the price.”

However, a source close to the deal said, “It will get done.”

However, whether the deal is a good one is up for debate. SunTrust Robinson Humphrey restaurant analyst Howard Penney, told Buyouts that the acquisition would be a “disaster for whoever buys the company.” Penney added, “Thirty percent of the franchisees are near bankruptcy, and if the parent is highly leveraged, where is the money going to come from to fix the system?” Penney said that the original purchase price is too high.

However, Glass believes that Burger King “has a tremendous amount of brand equity,” adding that the company “still serves the most popular burger the Whopper.” Glass notes, though, that McDonald’s currently has twice the market share as Burger King with a commensurate amount of advertising.

The divestiture is part of Diageo’s initiative to transform itself into a premium drinks company. It has already sold off its Pillsbury unit earlier this year to General Mills for $5.9 billion and the company also acquired Seagram’s spirits and wine businesses to boost its liquor offerings.