Wednesday, August 02, 2006

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.


whydibuy said...

This all comes down to that simple, age old question; who's smarter, the buyer or the seller? Thats what I always think when I read about such offerings from these financial guys. Do you really think they're going to give buyers a bargain? They're there to make the maximum profit for themselves and as the other age old saying goes buy low and sell high. And it seems they find ready, willing suckers, er, I mean buyers for their pigs with lipstick. And not just ipo's. There's lots of corp suckers too. Like Del Monte buying meow mix from a private equity firm for 700 mil; about 5 times what the private guys paid. Makes you wonder. How come DLM mgt type guys can't ever achieve the same kinds of product development themselves. Buy a moribund product and give it a kickstart. No,They have to go and buy it, at full price or higher from these private equity guys.

Simeon said...

The Burger King deal makes you wonder what supposedly intelligent institutional money managers are thinking buying IPO shares in private equity flips. If there was ever a case of caveat emptor, this is it!

Its_strange said...

"Learn to be still" was a line in a song by the Eagles. I quoted it when my sister told me she thinking about moving into a bigger home a few years ago. She really didn't need it ......Wallstreet and Kudlow type think only commies or weirdos think that way. ....

brian said...

how to make money the private equity way: take a company private, extract exorbitant fees, saddle company with debt arising from fees, IPO on unsuspecting public, sell remaining stake before stock sinks.

Oldnative said...

One would hope that the IPO investors would wake up to the fact that they are the take-out bid for these financial scams but I doubt it.

I agree that there is a crisis out there at some point in the future - just what the clucks in Congress would love to see so they can find something new about which they can pontificate.

bgthej said...

At the same time, the current bear market we are in (or are going into) could save private equity. As stocks get increasingly cheap and investors continue to overreact severely to even slight blips or indications of weakness, private equity could step in and end up with new acquisition candidates. However, I do agree that investors chasing return in almost every market, from commodiities, to bonds, to equities, to private equity, is going to be an issue over the next few years. The root issue is there has been too much money supply out there chasing returns over the past few years.

Cheesehedgie said...

Funny- I work at a large hedge fund and today received a cold call, out of the blue, from some start up private equity firm I've never heard of. The chipper, if impertinent, young lady on the phone wanted to know if our fund had any illiquid, private equity style investments we would kindly like to unload? Because, as she brightly informed me, "We're buying!"

Hmmmm...maybe private equity is becoming the liquidity provider of last resort. Due Diligence, i'd like you to meet my friend Adverse Selection.

fiveyearhold said...

Great article. Here's another interesting one...

sigster said...

oldnative: betcha Congress keeps quiet for a bit longer than you think: Bill Frist sold all his HCA about two weeks before it issued a disappointing earnings report and the price fell nearly 15 percent. He then passed a ludicrously ineffective and complicated drug plan. His brother then orchestrated the private equity LBO of HCA.

cheesehedgie: love the line. May be my new BBerg header. Watch as they will repack the adversely-selected assets into a structure (taking more fees) which adds "diversity." Thus ensuring they can remain stupid for longer than solvent

PrivateInvestor said...

Cheesehedgie, they're called secondaries. They've been around for a while. Some of them raise funds from investors who don't have access to the likes of KKR and Blackstone and other huge PE funds, e.g. smaller private banks, financial institutions, family offices etc...

Back to the point of the article, it seems to me that in discussions about nearly every asset class (fixed income, equity, private equity, real estate, commodities etc...) everyone is talking about how all assets are overvalued and how stupid buyers are (All buyers, retail, institutions, financial sponsors, etc...). What is one to do? Hold cash? Give up?

Reggie said...

I work for Burger King. I love it. I flip Burgers. Check Out My Blog To see what i do next

eeeeeekonjohn said...

care to review BKC, jeff?