Burger King Returns $394M to PE Owners

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Last week, I&nbsp;published the Restaurants and Private Equity 2011 Update paper. It is available <a href="http://www.bluemaumau.org/restaurants_private_equity_and_franchising_ov…; target="_blank">here</a>. At the time, Burger King&#39;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.<!--break-->&nbsp; On Thursday November 10, Burger King held its Q3 2011 earnings call and filed its 10Q with the Securities and Exchange Commission.</p>
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Company and debt tolerance conditions are apparently&nbsp;favorable&nbsp;enough for its PE owner that it&nbsp;is now working a $393M dividend payable back to 3G Capital by December.&nbsp;It was noted in the earnings call briefly, and the wording from the recent 10Q is below:</p>
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On October&nbsp;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&nbsp;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.</p>
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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,&nbsp;one of the due diligence concerns known to everyone in the restaurant sector&nbsp;was that Burger King units, both company and franchisee operated stores, were in need of remodeling and store physical plant renewal,&nbsp;estimated then at $3B. If all BKC company stores were remodeled at BKC&#39;s just updated&nbsp;cost of $200-300K per store, that would be a $3.2 billion CAPEX tab.</p>
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This remodeling deficit itself was a partial legacy of the $200M BKC CAPEX &quot;cap&quot; that it operated under&nbsp;after prior PE owners Bain Capital/Texas Pacific Group/GSCG PE group, took it public in 2006.&nbsp;&nbsp;</p>
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Evidently, this decision implies that 3G&#39;s cost of capital (for the borrowed debt)&nbsp;is greater than the upside return from remodeling restaurants, and the anticipated, hopefully positive sales and profitability results that may result.&nbsp; Otherwise, why would 3G do it?</p>
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To be sure, since acquisition, 3G has swept out the prior&nbsp;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&#39;t reported, but with some high profile franchisee auctions and liquidations noted in 2010 and 2011.</p>
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The 3G&nbsp;Capital investment priority signal is perplexing, perhaps signaling a slower US recovery reality.</p>