McDonald's has a market capitalization of $100 billion for a reason. With the exception of a few years in the early 2000's, McDonald's executives have been very good stewards of their shareholders' capital. Sadly, the same cannot be said for Burger King's leadership over the past 10 years and the latest developments will do little, in our view, to enhance the company's reputation.
The Burger King brand has been a cash cow that has lined the coffers of several different firms such as Pillsbury, Grand Met, and Diageo from 1989 through 2002. Private equity firm TPG Capital and others got in on the act from 2002 through 2006. From 2006 through 2010, PE firms tried to cash out while the company was public but, ultimately, the chain failed to gain fundamental momentum and 3G Capital took it over.
Now, 3G plans to list Burger King on the New York Stock Exchange, in a complex deal that will result in the private equity firm owning 71% of Burger King with the rest owned by Justice Holdings, a special purpose acquisition company owned in part by financier Bill Ackman and his hedge fund, Pershing Square Capital.
Our view is that the overriding motivation of several owners throughout the years, and now 3G Capital, has been to starve the brand of capital in order to pay parent shareholders nice and quickly. Burger King's issues may be so substantial that the chain may be "too big to fix", at least in the near term. By our reckoning, the last two private equity firms that have taken ownership of the company have deprived it of $1 billion or more in capital that could have been used to improve the company's relative standing versus its competitors, many of whom Burger King now struggles to keep up with.
The least favorable comparison for Burger King is McDonald's. Between 2002 and 2011, McDonald's (MCD) has spent between $5 billion and $6 billion in capital expenditures on its U.S. business alone. While McDonald's system is still in the process of being upgraded and does include some stores in need of remodeling, a plan is in place and the system has not been starved of capital as Burger King's has.
However, despite the continuous issues that have dogged the chain, its owners of 18 months have claimed that Burger King is back. Somehow, having invested no capital into fixing the business, its problems have been resolved.
Ask yourself how many of your own problems you've solved by ignoring them. Not many. Not only has 3G Capital not invested any capital in the company, it sucked $295 million out of the business last year. The evidence for the company being back, in terms of its fundamental performance, is four months of positive same-store sales during the most favorable weather the restaurant industry has seen in years. Before this recent period, comps were negative for three years.
There are very few industries that are more competitive than the quick service segment of the restaurant industry. Consumer tastes are constantly changing and barriers to entry are low. The dramatic changes that have taken place within the industry over the past ten years underscore that point. The bar has been risen in terms of the consumer experience at every stage of the process; Chipotle's (CMG) "assembly-line" ordering, Starbucks' (SBUX) look and feel, and Domino's online ordering experience are three examples of companies making the necessary investment to capture share.
