PREMIUM SEARCH Search by job title, geography and build a list of executive contacts
If news about the planned Burger King IPO caught your attention last month, don't count on getting your Whopper's worth when this stock hits the market, probably in late fall or early 2001.
After nearly 50 years in private hands or as a subsidiary of a conglomerate, Burger King will likely become a stand-alone company, says parent Diageo, the liquor company and maker of Guinness. While it looks like a tempting play, before biting into this stock offering, consider the tenuous management history of Burger King and the poor market performance of its competitors, McDonald's (MCD), Wendy's International (WEN), and Tricon Global Restaurants, which owns Pizza Hut, KFC, and Taco Bell (YUM). After you do, your appetite might not be so hearty, say analysts who cover the industry.
Burger King is certainly trying to spruce up its image. It has updated its logos and uniforms, renovated "drive-thru" stores, changed its method of cooking french fries, and capitalized on a successful Pokémon toy promotion. And let me be completely upfront here: I really like to eat at Burger King. Great hamburgers.
LACKING BITE.
But the Miami-based company is competing in a market defined by slow U.S. sales growth and pressure to generate greater profits overseas. Even McDonald's, the granddaddy of the fast-food industry, doesn't grab the stock-market headlines that it once did. McDonald's has fallen to $32 a share, from a high of $49 last fall, mostly on concern over slowing sales worldwide.
Tricon's stock has fared even worse, losing almost half its value since last summer, as the company unloads a mountain of debt by selling hundreds of stores to franchisees. Tricon's stock sits at $31. "These are mature, predictable growth companies that have fallen out of favor," says Salomon Smith Barney fast-food analyst Mark Kalinowski.
Wendy's has performed better financially, posting 3% same-store sales gains in May -- a departure from BK, McDonald's, and Tricon, where same-store sales have slipped. But Wendy's stock remains listless, at $19 a share, down from a high of $31 a year ago. "It would be a tough environment for an IPO now," says Robertson Stephens analyst Matthew McKay, even for Wendy's, he adds.
EXEC TURNOVER.
The big question among investors might be why Burger King didn't go public years ago, when Wendy's and McDonald's took the leap. Back then, fast food was a growth business in the U.S. But now, it has slowed to a trickle.
Meanwhile, BK has labored through a series of ownership changes. The Miami founders sold the business to Pillsbury in 1967. Then, Grand Metropolitan acquired Pillsbury in 1988. Three years later, Grand Met merged with Guinness to form Diageo, maker of Smirnoff vodka, Gordon's gin, and Johnnie Walker whisky. But through all those deals, BK still could post only a distant second in the U.S. burger-chain market, squarely placed behind McDonald's, but ahead of Wendy's.
The changing ownership led to a string of management changes that still cloud the burger chain's future. The company has had five chief executives in 10 years, with the current CEO, Dennis Malamatinas, stepping down in August. Guinness exec Colin Storm will take the reins temporarily, but completing a successful CEO search is critical for a Burger King IPO, say the analysts.
"Certainly, BK has a long-established brand that, when managed properly, should deliver consistent same-store sales growth and profit gains," says J.P. Morgan's John Ivankoe. And given the franchise nature of the business, BK should provide a stable cash flow. "At the end of day, that's why any business attracts investors."
SHADOW OF THE ARCHES.
However, "a public offering would be predicated on a management team that investors have confidence in," Ivankoe says. "It's fair to say that Burger King would trade at a discount to McDonald's -- based on where McDonald's is globally compared to Burger King -- and based on the perceived quality of the current McDonald's organization, the diversity of its operating income, and the company's recognized brand name around the world," he says.
No prospectus is available yet on Burger King, so the Street is limited to the company's latest report to franchisees (who own 92% of the chain's 11,000 restaurants) detailing last year's financial performance. While Burger King has witnessed strong growth in some foreign countries, notably Spain and Britain, more than 70% of its business remains in the U.S., where sales growth has slipped, the report says.
Because Burger King owns fewer stores and far less valuable real estate than McDonald's, franchisees have more clout. In fact, the restaurant owners have pressured Diageo for the IPO. They don't like Diageo's conglomerate structure, with its higher-margin liquor and beer sales. Many franchisees have blamed the parent for disappointing performance and the high management turnover.
SLOW TO SIZZLE.
"The Burger King chain has been dead weight in Diageo investors' eyes," says McKay. Diageo officials declined to respond, but a Burger King spokeswoman in Florida says the company's growth has been "aggressive," both in the U.S. and in Europe.
As Diageo prepares for the IPO, however, the Golden Arches keep expanding. During the six months ended Dec. 31, Burger King provided only 7% of Diageo's sales, or $756 million, from 11,000 restaurants -- after franchise owners took their large cut. Compare that to McDonald's, which had $6.6 billion in sales from 28,000 stores. "Burger King very likely would not get as high a valuation as McDonald's, which is a global consumer brand like Coca-Cola or Gillette," Kalinowski says.
Still interested in BK? The IPO plan calls for Diageo to spin off 20% of the company, with the balance to be floated in a secondary offering by 2003. But don't expect investors to salivate. Fast-food stocks have been burned to a crisp amid slowing sales growth.
How Burger King fares will depend on how the fast-food sector performs -- and so far, BK's competitors have failed to sizzle. A solid management team could make this company a safe long-term stock. But for short-term investors, the smart bet might be to skip this meal. If you want a quick Burger King fix, you're probably better off buying a Whopper.
Shook is a staff reporter for Business Week Online in New York
Copyright 2000 , by The McGraw-Hill Companies Inc. All rights reserved.
Printer-Friendly Version
