Burger King bought by private equity firm 3G capital in $US4 billion deal

America’s second-largest fast food franchise Burger King has agreed to a $US4 billion takeover offer from investment group 3G capital, sending the company’s shares up 23% to $US23.25 overnight.

Following days of speculation, both companies announced in a statement 3G would acquire Burger King at $US24 a share in cash for all outstanding shares of common stock. The deal will occur within the last quarter of the year.

The announcement comes after Burger King reported disappointing sales for both its US and global operations in 2009-10, with increasing pressure caused by the financial crisis and increased competition from market leader McDonald’s. Its target market – younger Americans – has also held back from spending as youth unemployment remains high.

Analysts suggest the investment opportunity will give Burger King a chance to create new menu products and diversify into new types of foods, creating more of a challenge for key rivals including McDonald’s and Wendy’s.

This is the key issue frustrating franchisees, according to the Wall Street Journal, with some saying the company is struggling to keep up with the fresh-food craze being pushed by McDonald’s and other fast-food restaurants.

“You’ve got females out there who want salads,” franchise owner Steve Lewis told the publication. “Our dessert line hasn’t grown the way it needs to, and our beverage line hasn’t grown the way it needs to.”

“If a new set of owners come in and continue to do the same things, it would be just devastating. You can’t just be the dollar king.”

Last week Burger King announced worldwide comparable sales were down 0.7%, with US and Canadian comparable sales down 1.5% for the June quarter. Over the year, those sales were down 2.3% and 3.9% respectively.

“In fiscal year 2010, we faced sustained levels of high unemployment and a fragile global economy that combined made this one of the toughest operating environments in recent history,” chairman and chief executive John Chidsey said last week.

He reflected that weakness in the joint statement with 3G capital, saying the company’s “proven track record as in investor… will serve to further strengthen the company”.

3G managing partner Alex Behring said the firm has “great respect” for the Burger King business. It will be focussing on a long-term investment with the company, Behring said.

Following the transaction, Chidsey will take on the role of co-chairman of the board, with Behring also to be appointed as co-chairman. TPG Capital, Goldman Sachs Capital and Bain Capital Investors own about 31% of the outstanding shares and will tender in to the offer, both companies said.

Those three companies actually purchased Burger King for about $US1.5 billion in 2002. They eventually took the company public in 2006, netting over $US400 million through which it paid down debt.

Burger King, which operates over 12,000 outlets in several international locations, including the Middle East and Latin America, although about 60% of stores are in the US.

The company has traditionally relied on a franchise model. Originally franchisees were given rights to a geographical territory and were given freedom to expand within that area, however this led to several management problems and the business was eventually restructured.

Many of the international franchises still operate in this structure – Australia’s Hungry Jack’s franchise being a prime example, with over 300 locations. It is still operated and owned by Competitive Foods Australia, led by Jack Cowin.

Burger King and Hungry Jack’s were involved in legal battles for years earlier in the decade, with Cowin taking the corporation to court for allegedly violating the master franchise contract. Cowin accused the company of wanting to take the Australian market for its own, branding new stores under the Burger King label.

Hungry Jack’s was contacted for comment this morning on how the purchase would affect local operations, but no reply was received before publication.