• Jeff Matthews

Burger King Flippers Toast New Buyers: Who’s Next?

Burger King Posts Loss, Tepid Sales Results Underscore Concerns Owners Took Big Payments And Left Investors in a Pickle

KKR Appears to Win Philips Unit Deal With Silver Lake May Exceed $10.25 Billion For Semiconductor Division

What, you might be wondering, do those two headlines have in common? Well, both appeared in today’s Wall Street Journal. And they are both, in my view, two sides of the same coin.

On one side of the coin, Burger King, in its first quarter as a newly public company, missed sales targets set by Wall Street’s Finest—not the thing to do your first quarter out of the gate. The stock traded as low as $12.50 a share, which is something the poor shlubs who bought 25 million shares at $17.00 a share just 77 days ago were not expecting. As the Journal notes:

The [sales] results underscore concerns that Burger King’s private-equity owners took huge payments while leaving investors with a struggling company that has yet to turn the corner. Dragging down the earnings was a $30 million management-termination fee that Burger King paid out during the quarter to owners Texas Pacific Group, the private-equity arm of Goldman Sachs Group Inc. and Bain Capital.

That $30 million was not the only vig the private-equity owners skimmed here. As the Journal noted in a previous story on the Burger King deal:

According to company filings, the three firms collected a total of $448 million in dividends and fees from Burger King — approximately what they initially invested. All that took place before the May stock sale, which valued their remaining stakes at $1.8 billion — more than triple their original investment.

Now, in case you’re wondering precisely what these savvy flippers of Burger King bequeathed to that company in return for that near-half billion pre-IPO cash-out—great strategic initiatives, far-sighted new agendas, insightful management ideas—I refer to the story in today’s Journal, which quoted CEO John Chidsey:

Mr. Chidsey told investors Burger King is trying to persuade franchisees to open one hour earlier in the morning and stay open one hour later in the evening while pushing its omelet sandwich to lift breakfast sales. Mr. Chidsey says Burger King plans to more aggressively court children through movie and game promotions. Wow! Talk about out-of-box thinking! Movie tie-ins! Game promos! Omelets!

Props to Chidsey!

I am being sarcastic, of course. But let’s soberly move on and see where the KKR/Silver Lake story fits in here. Where it fits is this: it is the other side of the private-equity coin, and again I quote today’s Journal:

The bidding for the Philips unit “was brutal,” says one lawyer who represented one of the unsuccessful groups in the bidding. As the rivals bid the price up, “everyone lowered their expectations on returns” they were willing to accept from the transaction. The private-equity business “is really stretching now” to do deals, this person said.

So, we have private-equity buyers “really stretching” to make deals work. And we have at least one of the largest of the recent crop of already-done deals groping for customers by adding omelet sandwiches to its menu and trying to get franchisees to open the doors an hour earlier.

Lower margin of error + lower deal quality = recipe for disaster.

A year or more ago I wrote about the impending energy crisis of 2006. I’m not claiming any particular smarts here—the math (84 million barrels a day worldwide demand + declining supply = crisis) was easy enough that even I could grasp it.

But now I’ll go out on what I think is an even stronger, sturdier limb and call 2007 The Year of the Private-Equity Crisis.

Let the buyers beware.

Jeff Matthews I Am Not Making This Up © 2006 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

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