The Challenges Facing Burger King Buyer 3G Capital

  The investment outfit and its Brazilian backers will need to do more than just cut costs at the    troubled burger chain

By Diane Brady

When it comes to the pitfalls of operating a fast-food chain, Burger King (BKC) has experienced them all: falling profits and sales, angry franchise owners, mediocre innovation, growing competition, and a razorlike focus on the very customers who have been hardest hit during the recession. So when a little-known investment outfit called 3G Capital said it would buy the Miami-based chain for about $4 billion on Sept. 2, an obvious question was: why?
Burger King may be the world's No. 2 hamburger chain, but it's a distant runner-up, with 12,174 restaurants worldwide vs. 32,466 for McDonald's (MCD). McDonald's averages about twice the sales volume per U.S. outlet, and its stock has far outperformed that of its rival on the strength of new products such as coffee drinks and smoothies. Burger King, in contrast, has seemed fixated on hawking a $1 double cheeseburger—now $1.29 following a bitter lawsuit with franchisees who claim it's a money loser. The chain has also narrowed its target audience, chasing young men with cheeky ads, while McDonald's has gone for broad family appeal.
Sources close to 3G say the partners are betting they'll be able to trim costs (though no more than 10 percent) and ramp up international expansion to make the deal work. (3G has also been in the news lately as the employer of Marc Mezvinsky, Chelsea Clinton's new husband.) Most of 3G's money comes from three Brazilian billionaires: Jorge Paulo Lemann, Marcel Herrmann Telles, and Carlos Alberto da Veiga Sicupira. They've offered investors $24 per share, 46 percent more than Burger King's Aug. 31 closing price. If the deal goes through—which is likely, given the support of the board and the private equity firms that hold 31 percent of shares—the chain will go private for the second time in less than a decade. (TPG Capital, Goldman Sachs Capital Partners, and Bain Capital bought Burger King from Britain's Diageo (DEO) for $1.5 billion in 2002 and took it public in 2006.) Investors then expect 3G to expand in faster-growing markets such as Latin America and Asia.
Burger King declined to comment beyond public releases. In a letter to franchisees, 3G Capital Managing Partner Alex Behring, who will be co-chairman of the chain once the deal closes, wrote about 3G's "hands-on management approach" and intention to invest in the brand.

Cost-Cutting Expected

Yet the first priority, given the Brazilian investors' past record, is likely to be a rapid-fire push to cut costs. That's certainly been the case at Anheuser-Busch Inbev (BUD), the world's largest brewer, which Lemann's group helped create when InBev, the Belgian brewer it had a stake in, completed a hostile takeover of the American brewer two years ago. Lemann, Telles, and da Veiga Sicupira all sit on the board of the merged company. After the merger, former Anheuser-Busch employees soon lost perks ranging from business-class flights and BlackBerrys to free cases of beer. About 1,400 quickly lost their jobs. Gone were the lush furnishings and private planes. Even Brazilian-born Chief Executive Officer Carlos Brito flies economy class.
Through a spokesman, 3G issued a statement saying "any potential opportunities for cost efficiencies will be managed with the overall benefit of the company in mind, without compromising the franchisees." A person familiar with 3G's plans for Burger King says the company is ripe for cost-cutting, especially at company-owned restaurants, which are typically less profitable than those operated by franchisees. This person says labor costs are high at these restaurants, as is overhead at the Miami headquarters.
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