Burger King's Return To NYSE Rates Low On The Excitement Scale

by: Jacob Steinberg

British investment company Justice Holdings has paid $1.4 billion to acquire 29% of Burger King, and when all is said and done in a few months, these shares will be listed on the New York Stock Exchange. That will mark the first time the company will be listed on the NYSE since 2010. Should investors get excited and expect similar results from Burger King that McDonald's (MCD) has achieved over the past several years? I wouldn't bank on it.

Recently, Burger King made some adjustments to its menu in order to widen its target audience. Some of the new products -- such as salads, smoothies, and snack wrap options -- will target women and children, who tend to avoid Burger King as the food portions are usually seen as too large for many members of these two demographic groups. The smaller and healthier options are likely to attract more women and children to eat at Burger King. The company will attempt to gain market share from both McDonald's and Wendy's (WEN), which hold the top two spots in the U.S. fast-food market in terms of market share. Meanwhile, emerging competition such as Yum Brands (YUM), Chipotle (CMG), and Jack in the Box (JACK) will pose an additional threat to Burger King's market share. Keep in mind that until last year, Burger King had higher U.S. revenue than Wendy's, and the company's American market share has been on the decline since then.

Burger King has been going through a cost-cutting program in the past year. This program includes efforts such as selling many restaurant locations to franchisees, replacing low-margin products with higher margin products, and renovating some of the existing locations. The program has been only partly successful so far, as the company continues to lag behind McDonald's and Wendy's. For example, McDonald's has come up with new ideas such as McCafe in order to fuel aggressive growth, whereas Burger King's measurements are mostly focused on cutting costs, which aren't likely to result in significant revenue or market share growth. In the U.S., each McDonald's location generates yearly revenue of $2.43 million, whereas each Wendy's location generates revenue of $1.43 million. For Burger King, this number is only $1.14 million.

In 2010, 3G Capital paid $3.3 billion to privatize the company. Currently, the company's valuation is expected to be just above $4 billion. Burger King's board of directors will see some minor changes, as Alan Parker and Martin Franklin will join the board. Alan Parker has past experience as a restaurant and hotel executive and Martin Franklin is the executive chairman of Jarden Corp., a consumer products company. Only time will tell how much success this addition will bring to the company. On a side note, the company is also getting rid of the King mascot in order to create the perception that it is going through significant changes.

Burger King will have to achieve a great turnaround in order to regain its past status. It must engage in marketing aggressively in order to attract the customers it lost to its competition. It will also have to gain the confidence of investors as many people don't see value in this company anymore. In 2011, the company earned $503 million before taxes, up from $320 million in 2010. In 2012, it expects to earn $650 million before taxes. While the company's earnings have gone up, its same-store sales were down by 3.4% in North America due to increased pressure from competition.

The company wants to sell as many of its locations as possible in order to receive royalty from franchisees rather than operating these locations. The new business model, if it works out, will provide the company with relatively stable cash flow and relatively low rate of expenditures as franchisees will take over most of the expenditures related to operations of the locations.

The company's CEO Daniel Schwartz had announced that Burger King was considering going public by 2013, but now this would happen sooner than previously planned. Mr. Schwartz also said that it would save management the burden of dealing with an IPO and allow their energies to be focused on turning the company around. While he may have a point, I don't agree with Mr. Schwartz. I don't think it's a good idea to have the company go public when it's not ready to do so just for the sake of avoiding the burden of an IPO. The company lacks a specific niche, such as the ones of Subway, Chipotle or KFC, and it doesn't offer anything new above and beyond its competitors at the moment.


I believe that Burger King's executives are taking the right steps to turn the company around; however, I don't think they are taking these steps fast enough. I think the company is hurrying in going public again. It would make more sense to wait a few years, see how the turnaround works out, and then go public. That way, there would be more stability and confidence behind the company.

As an investor, I wouldn't put my money in a company I am not confident in. If the turnaround works fine and the company gets back on track with organic growth, I don't mind investing in Burger King. But currently it is too early to tell as the company is just going through the very first steps of its turnaround. Also, waiting until the later stages of a turnaround would raise far more money than the company can today. If a company is willing to forgo possible future gains for quick gains at the moment, the board might not be very confident in how the turnaround will actually turn out. At the moment, I am skeptical about Burger King.

Disclosure: I am long MCD.