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February 17, 2006
Burger King, financially sounder but whopper sales lagging
As promised after Chipotle's stunning IPO debut last month, Burger King has dutifully filed a lengthy S-1 registration statement to sell $400 million of shares to the public and reverse its December 2002 leveraged buyout deal. No info in this preliminary filing about how much the shares will sell for or what valuation will be put on the company. (I took a broader look at the improving IPO market in this week magazine, but the article is still behind the subscription wall right now.)
Burger King's total revenue for the last half of 2005 was up 5% to $1.02 billion, income from operations was up 29% to $142 million and net income (after including the debt burden from the LBO and paying Uncle Sam) was up 9% to $49 million. How to explain the improvement in operating income? Standard LBO playbook -- cut expenses. S,G & A dropped 10% even as sales rose. The bad news, though, was that comparable store sales were pretty weak, up just 1.3% in the second half of 2005 versus a 7% gain in the comparable period of 2004. There are some fascinating nuggets contained in the S-1 including how an under-tested, over-discounted "value meal" plan in 2003 cannibalized sales as the company lost $868 million in its fiscal year (ended June 30). To improve results, the current value meal offerings have higher margins and BK has introduced new, more appealing premium products as well, the company says.
Other red flags - the company borrowed money to pay for most of a $367 million cash dividend to the LBO sponsors and a $33 million "compensatory" payment to senior management this month. Hmm, $400 million, where have I just seen that number? Page one of the S-1? Since proceeds of the IPO will be used to pay back debt, the shares sold by BK won't be much different than the shares sold by the LBO shareholders themselves. We'll have to wait for more info about where they plan to price this deal, but it doesn't look super appetizing yet.
McDonalds (MCD) trades at about 18 times trailing earnings, 2.24 times sales and has a total enterprise value of about 10 times its ebitda. I don't think BK is going to merit a valuation anywhere near those levels but at 10 times trailing 12-month ebita, BK would carry an enterprise value of about $2.7 billion (and that's with $1 billion of debt as of 12/31/2005).
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