Burger King Holdings Inc., the perennially number-two hamburger chain in North America, is selling itself to little-known private equity firm 3G Capital in a deal valued at US$3.26 billion.
Thursday’s $24-per-share tender offer represents a nearly 46% premium over the company’s stock price before rumours of a buyout began circulating.
Under the terms of the deal with 3G, Burger King’s chairman and CEO John Chidsey will become co-chairman of the board and will be joined by 3G managing partner Alex Behring as the other co-chairman.
Burger King, with its 12,100 locations around the world, lags its far larger competitor McDonald’s Corp. , and has struggled to keep up with its rival during the economy’s rollercoaster of the past two years.
Among the biggest problems: high unemployment among its most important, but notoriously fickle, group of customers of young men 18 to 34.
It’s more than the bad economy that’s led to five consecutive quarters of declines in sales at locations open at least a year.
Burger King’s once-unique concept of flame-broiled burgers isn’t so rare any more, thanks to a boom in gourmet hamburgers from smaller competitors such as Five Guys, The Counter and In-N-Out Burger in the U.S. And it’s hard for Burger King to make solid profits while competing with McDonald’s super-low prices.
“McDonald’s is just eating their lunch,” said Bob Goldin an analyst at the food consulting firm Technomic Inc. “Burger King’s very heavily focused on a core audience of the younger male. And with that group, their attention goes to wherever has a better deal or whatever is hotter.”
To turn things around, Burger King may need to try a slightly different approach with the help of 3G Capital, analysts said.
Among the ideas: becoming more efficient, expanding its international business, and creating a new niche menu that’s less about trying to copy McDonald’s and more about adding new and innovative items to its menus that will keep its hungry customers coming back.
So far, it’s already had some success with its popular BK Ribs, which even at a high price of $7 for an eight-piece order, sold out earlier than expected this spring. The company is also changing its breakfast menu.
“This will give them more of an opportunity to develop a compelling menu,” said Morningstar analyst R.J. Hottovy. “And having a backer probably allows them to be more aggressive in terms of international expansion plans.”
Others, though, think there could be few changes ahead.
UBS analyst David Palmer told investors he thinks that the company needs to work with its large group of franchise owners to brighten its locations.
“In our view, improved restaurant assets will be a key to stabilizing sales–and this is something that could take several years and require significant reinvestment in assets,” he wrote in a research note.
