Earlier this week, a well-known company went public in a complicated transaction that involved a handful of Wall Street sharpies and a mysterious investment vehicle called a SPAC. The company was Burger King.
If you are surprised to learn that the home of the Whopper — not to mention the bacon sundae — would find itself the subject of complex financial machinations, you shouldn’t be. Burger King has long been an enrichment scheme for clever financiers, who have sucked hundreds of millions of dollars out of it over the years. Maybe it will be different this time. Or maybe not.
Financial engineering has been part of the Burger King story for so long that it’s hard to believe there is still anything worth plucking from its carcass. “It’s been run as a cash cow for Wall Street,” said Bob Goldin, an executive vice president of Technomic, a food service consulting firm. Along the way it’s had 13 chief executives in 25 years, numerous strategy shifts and marketing campaigns — and has been constantly starved for cash. But, hey, the private equity guys got theirs. And isn’t that what really matters?
Burger King first became financial fodder in 1967 when it was bought by Pillsbury, which didn’t have a clue about how to run a restaurant chain. Then in 1988, a British company, Grand Metropolitan, initiated a hostile takeover and won Pillsbury. The new owners vowed to turn Burger King around.
It didn’t happen. Nine years later, Grand Met merged with Guinness to form Diageo, by which time Burger King’s role was well established. It shipped cash to headquarters, even as it lagged ever further behind McDonald’s.
Enter — ta-da! — private equity. In 2002, Goldman Sachs, along with two private equity firms, TGP and … hmmm … Bain Capital, teamed up to buy Burger King. This is exactly the kind of situation private equity firms like to trumpet: taking over a downtrodden company and nursing it back to health. And to get them their due, Burger King’s new owners did some good, stabilizing both the company and the franchisees, many of whom were in worse shape than Burger King itself.
But the private equity investors also cut themselves an incredibly sweet deal. Their $1.5 billion purchase price included only $210 million of their own money; the rest was borrowed. They immediately began taking out tens of millions of dollars in fees. Four years later, they took Burger King public. But, first, they rewarded themselves with a $448 million dividend. In all, according to The Wall Street Journal, “the firms received $511 million in dividend, fees, expense reimbursements and interest” — while still retaining a 76 percent stake.
Does it need to be said that Burger King was soon back to its old struggling self? Or that the solution, once again, was to sell to another private equity firm? Of course not! In 2010, Bain, Goldman and TPG cashed out, selling Burger King to 3G Capital, for $3.3 billion. In sum, the original private equity troika reaped a fortune by selling a company that was in nearly as much trouble as it had been when they first bought it. Surely this represents the apotheosis of financial engineering.
What has 3G done? According to Howard Penney, the managing director at Hedgeye, it has prettied up the pig by laying off a large percentage of the staff in Burger King’s Miami headquarters. Burger King’s owners grew earnings, he said, “by cutting expenses. They have not improved the business one iota.” And, of course, 3G pulled out fees and dividends, too. In all, Penney wrote recently, private equity firms have taken for themselves “$1 billion or more in capital that could have been used to improve the company’s relative standing versus its competitors, many of whom Burger King struggles to keep up with.”
This latest deal is just as complicated as the ones that have come before. Three financiers, including William Ackman, the well-known shareholder activist, put together a special purpose acquisition company, or SPAC — a vehicle that allows them to raise money, buy a company and take it public without the hassle of an I.P.O. The SPAC then bought a stake in Burger King, though 3G is still in charge. On its first day of trading, Burger King had a market value of $3.3 billion. When you include its fees and dividends, 3G has already made a tidy sum on its original investment.
Ackman told me that the 3G guys are “the best operators around, bar none.” He sent me a presentation for investors that suggests that the owners are prepared to modernize the stores, expand abroad and make other moves that are necessary for Burger King to remain competitive.
For the sake of all the people whose livelihoods depend on Burger King, let’s hope that happens. And if it doesn’t? The financiers will still make money. They always do.