Why Burger King Went Public Again

3G Capital and friends taking Burger King public on the NYSE; photo/nyse

Burger King (NYSE:BKW) continued its organizational odyssey Wednesday by going public once again on the New York Stock Exchange.

 Private equity firm owner 3G Capital received most, if not all of its investment back by selling 29 percent of the company to activist investor Bill Ackman’s Justice Group. Because of the form of the deal, there was no initial public offering process, no underwriters nor marketing. It’s now done and publicly traded.

Going public was driven by 3G's desire to quickly get its investment back, and Bill Ackman, the activist investor coming in. Bill finally has a restaurant under his umbrella, which he has desired since 2005, after working in the past for deals with McDonald's and Wendy’s.

For investors, the BKW future was sold on growth, operating an asset light 100% franchisee model, low to no CAPEX, continuation of cost savings, and new product releases that 3G has been able to accomplish since 2010. There is a renewed international growth focus for sure, with a development deal for a thousand restaurants in China and a new deal in Russia for several hundred. At the May 8^th 2012 BKW debtholders earnings call, net restaurant growth was promised but no specific number cited.

Franchisees in the U.S. must deal with renovating their stores and interacting with the U.S. Burger King super franchisee, Carrols (TAST), which has been sold the "right of first refusal" of franchisee development in 20 states. Since achieving same store sales gains at any price is a pass/fail measure of success for any publicly traded restaurant, pressure on lower priced marketing could be in the offing. Some franchisees wish the private period was longer so that more “fixes” that have been out of sight of the investment community could have occurred.

I’d point out that the store economics—the ability of the restaurant to generate not just EBITDA but enough free cash flow to service and paydown debt, provide enough funds for remodeling, new store growth and franchisor returns is critical, no matter whether it is 100% franchised or not. An asset light franchisor is a great short-term story for Wall Street. But a solid economics foundation has to exist somewhere.

What can be seen in the recent Burger King SEC 10Q from January to March 2012 is that low company store margins in all geographies, except Latin America, are apparent. One can't build restaurants, service the debt, and remodel based on low margins. Keep in mind that franchisees must pay royalties and most likely have lower percentage margins than reported below: 

A key metric going forward is the restaurant sales to investment ratio. The higher the ratio the better. A ratio greater than 1:1 is needed for Burger King with its modest $ 1.2M -$1.4M  worldwide AUV range.