They paid too much. That was the consensus when 3G Capital took Burger King private in 2010 for a total enterprise value of $4bn, or nine times trailing earning before interest, taxes, depreciation and amortisation. How did things go? Well, Justice Holdings has just paid $1.4bn and will get 26 per cent of Burger King’s common shares in return. This now puts the enterprise value of Burger King at $8bn – an ev/ebitda multiple of 16 times (14 times if you follow Burger King’s practice of excluding restructuring and other costs). By comparison, the multiples for global powerhouses McDonald’s and Yum Brands are 11 and 14 times. Arcos Dorados, the largest Latin American McDonald’s franchisee, trades at 12 times.
3G’s partners put $1.2bn of cash into the original deal and borrowed the remainder of the price. They also paid themselves a near $400m dividend last year, thank you very much. If they had sold the whole company at the price Justice has paid, 3G would have more than doubled its money in a year and a half. Over the same period, McDonald’s and Yum shares have returned 38 per cent and 64 per cent, respectively. Consensus now: would you like fries with that, gentlemen?
The natural question now is whether Justice has overpaid. Same store sales fell last year and Burger King is losing share in the US. But Ebitda last year was a third higher than the period just before the buyout, due mainly to cost control. The proportion of restaurants that are franchised has risen slightly, which should stabilise financial results, and the geographic mix has shifted away from North America and towards high-growth Latin America. Both shifts are set to continue. But the current valuation implies that Burger King will execute its restructuring strategy perfectly. Heavy is the head that wears a crown.
