Last week, I published the Restaurants and Private Equity 2011 Update paper. It is available here. At the time, Burger King's 2010 $4B acquisition by 3G Capital was noted to be in the still-to-be-determined status; that is to say to answer whether the buy would work for investors, franchisees, and the brand itself.  On Thursday November 10, Burger King held its Q3 2011 earnings call and filed its 10Q with the Securities and Exchange Commission.

Company and debt tolerance conditions are apparently favorable enough for its PE owner that it is now working a $393M dividend payable back to 3G Capital by December. It was noted in the earnings call briefly, and the wording from the recent 10Q is below:

On October 19, 2011, the Board of Managers of BKCH approved a distribution to Parent and, subject to such distribution, the Board of Directors of Parent approved a return of capital distribution to the shareholders of Parent, including 3G, in the amount of $393.4 million, representing the net proceeds from the sale of the Discount Notes, payable by December 16, 2011, provided that the Board of Parent does not act to revoke its decision to declare the return of capital distribution prior to the payment date.

It is surprising that this is possible given that Burger King still owns and operates 1,295 units world-wide, mostly in the US and Canada. When BKC was acquired by 3G, one of the due diligence concerns known to everyone in the restaurant sector was that Burger King units, both company and franchisee operated stores, were in need of remodeling and store physical plant renewal, estimated then at $3B. If all BKC company stores were remodeled at BKC's just updated cost of $200-300K per store, that would be a $3.2 billion CAPEX tab.

This remodeling deficit itself was a partial legacy of the $200M BKC CAPEX "cap" that it operated under after prior PE owners Bain Capital/Texas Pacific Group/GSCG PE group, took it public in 2006.  

Evidently, this decision implies that 3G's cost of capital (for the borrowed debt) is greater than the upside return from remodeling restaurants, and the anticipated, hopefully positive sales and profitability results that may result.  Otherwise, why would 3G do it?

To be sure, since acquisition, 3G has swept out the prior Burger King executive management clique, set up a loan program for franchisees, changed ad agencies and marketing thrust, and rolled out new products. Company EBITDA dollars are improved. As always, franchisee cash flow conditions aren't reported, but with some high profile franchisee auctions and liquidations noted in 2010 and 2011.

The 3G Capital investment priority signal is perplexing, perhaps signaling a slower US recovery reality.