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Over the past three months we have heard a lot of rumors about restaurant companies going private, especially the ones that are underperforming.  I get the theory that restaurants can sometimes be operated more efficiently as a private company.  In some cases that might be true, but I don’t find it to be the case with Burger King.

Rumors of the company going private have the stock up $3, which makes some sense.  Coming into today, a $3.33 move higher would add one multiple point to the valuation of the company, putting the company more in line with the average of its QSR peers, trading at 7.8X NTM EV/EBITDA. 

That is about as good as it gets for BKC.  If TPG, Goldman and Bain Capital can get out of their positions at 8.0x EV/EBITDA, they will be very happy.  BKC has been underperforming and was trading at a discount valuation primarily because MCD had made life very difficult.  This is true for all of the direct competitors of MCD - WEN, JACK, BKC and TAST.  YUM has been less adversely affected due to its global geographic diversity.  CKE restaurants would have been included on that list but they went private.   

Look no further than EPS revision trends for the past six months, which shows all of MCD’s direct competitors seeing significant downward earnings revisions.  Additionally, all of these companies are trading at a significant discount to the overall QSR peer group.

As I said last week, I believe that MCD will post something close to a +7% same-store sales figure for the month of August (sales of Frappes and Smoothies accelerated in August from July).  Currently, MCD is taking a significant amount of incremental market share in the QSR space and some of this is coming directly from BKC.  As an aside, we are hearing rumors that MCD is going to do a national McRib promotion in November.  Talk about stealing the thunder away from “the King,” as ribs have been the standout driver for BKC this year.  McDonald’s is Burger King’s problem.  What will change under private ownership?

While I would not put it past TPG, Goldman and Bain to get a deal done, I don’t see it happening at a price higher than $20-$21.  I would use this liquidity event as an exit strategy if I owned the equity.  Bottom line, I don’t see a deal getting done.

BKC - GOING PRIVATE? - estimate revisions

BKC - GOING PRIVATE? - valuation tabel

Howard Penney

Managing Director