Burger King Soars on Buyout Talk - Analyst Blog

Burger King Holdings Inc. (BKC) shares jumped 16.7% to $19.19 on Wednesday pre-market trading, on the news that the company is in talks with potential buyers. The two interested parties can be a British private-equity firm 3i Group Plc, and a private investment firm 3G Capital Management.

One potential candidate 3i Group Plc confirmed that it is not in discussion with the Miami-based company Burger King. However, the status of the talks is unclear with the other suitor and Burger King has not yet commented on this issue.

Till date, market capitalization of Burger King is $2.6 billion while its enterprise value is $3.2 billion. Founded in 1954, the company is not new to private equity takeover. In 2002, Burger King was acquired by private equity funds controlled by TPG Capital, Bain Capital Partners and the Goldman Sachs Funds, a part of Goldman Sachs Group Inc (GS). The private equity firm purchased the company from Diageo plc (DEO), a British spirits company for $1.5 billion. In May 2006, Burger King went public, although private equity firms, including TPG, Bain Capital and Goldman Sachs Fund still own 31% stake in Burger King.

Burger King, the world’s second-largest hamburger chain after McDonald's Corp. (MCD), recently reported its fourth quarter and fiscal 2010 results. The fourth quarter and fiscal 2010 earnings dropped 16.0% and 8.0% year over year to 36 cents and $1.36, respectively. Total revenue plunged 1% year over year in both the quarter and fiscal year 2010. The results were hurt due to a decline in comparable sales as restaurant industry remains under pressure, given the economic downturn and a high level of unemployment.

We believe that the company will continue to struggle in fiscal year 2011, as Burger King expects the next year to remain challenging due to the continuation of sluggish economy and a weak consumer environment, resulting from the high unemployment rate. Though the possibility of the deal being finalized seems negligible, but based on the economic challenges being faced by the company, any such deal will be beneficial to the company.

We have a Zacks #4 Rank (short-term Sell recommendation). We also reiterate our long-term Neutral rating.