By Simon Avery
Shares of Burger King Holdings Inc. (BKC), which runs the second-largest U.S. hamburger chain, have surged almost 15% Wednesday after media reports that the company is in advanced buyout talks with a potential private equity firm.
Both the New York Times and Bloomberg cited unnamed sources saying that 3G Capital Management LLC was the interested party.
According to David Palmer, an analyst with UBS Securities LLC, it’s the superior performance of McDonald’s Corp. (NYSE:MCD) that is setting the stage for privatization across the fast food sector.
Here’s what Mr. Palmer wrote in his First Read report on the rumoured buyout:
“McDonald’s competitive out-performance and heavy reinvestment in its system has weighed on the valuations of such franchised restaurant companies as Jack in the Box, Sonic, Wendy’s/Arby’s Group, and BK. We believe that many of MCD’s competitors have underinvested assets and face difficult decisions — whether privately or publicly owned. The right private owner might help one or more of these chains eventually become better, and likely smaller, competitors to MCD’s.”
He calculates that Burger King could fetch a price of between seven and eight times EV/EBITDA (enterprise value divided by earnings before interest, taxes, depreciation and amortization). That formula would give BK a price of between $19 (U.S.) and $22 a share.
The stock is up $2.42 today to $18.87.
Other stocks that could benefit from the news include Jack in the Box (NASDAQ:JACK), Sonic Corp., Wendy’s/Arby’s Group (NYSE:WEN) and Brinker International (NYSE:EAT), Mr. Palmer said. They are all showing solid gains today.