Burger King in Advanced Sale Talks

(Reuters) – Burger King Holdings Inc (BKC.N) is in advanced talks to sell itself to investment firm 3G Capital, the New York Times reported on Wednesday, boosting shares more than 16 percent .

3G could not immediately be reached and a Burger King spokesman declined comment.

The second-biggest U.S. hamburger chain has underperformed rivals like McDonald’s Corp (MCD.N) as its key customer base of young men has been hit harder by unemployment in the past two years.

That group has suffered massive job losses in industries like construction and manufacturing.

The company, which has a market capitalization of about $2.3 billion, debuted as a public company in May 2006 with an initial share price of $17.

Shares were up 15 percent to $18.92 in midday trading.

Famed for its flame-broiled Whopper, Burger King had previously been owned by private equity firms, which still hold a stake in the company. TPG, Bain Capital and Goldman Sachs purchased Burger King from British beverage company Diageo (DGE.L) in 2002 for about $1.5 billion.

One of the potential suitors, British private equity firm 3i Group Plc (III.L), distanced itself from a possible deal.

“We can confirm that we are not in discussions with Burger King,” a spokeswoman for 3i said.

Burger King last week forecast weak demand during its new fiscal year due to the U.S. economy’s slow pace of recovery and government austerity programs in several European countries. The company said it was unsure how costs for key ingredients like beef would impact the company.

Its shares hit a low of $16.30 in mid-August, but surged to $19.50 in premarket trading on Wednesday.

Private equity firms have become increasingly active and last month was the busiest August since 1999 in terms of the value of merger and acquisition deals struck.

In August, Blackstone Group struck a deal to buy power company Dynegy Inc for $543 million, or $4.7 billion including debt.

Ten Most Powerful Franchise Associations

Blue MauMau attempts to rank the ten best-known and influential associations.

When it comes to industrial might and lobbying power, the franchise industry is lopsided. A few big groups have the lion’s share.

Franchise Association	Revenue ($1000)	PAC (x$1,000)	Paid Members
Auto Dealers (NADA)	$45,000	$5,100	17,000
Franchising Firms (IFA)	$10,578	$315	2,238
Hotel Owners (AAHOA)	$6,200	$300	10,216
7-Eleven (NCASEF)	$4,000	$2,500	3,500
Burger King (NFA)	$1,200	$200	5,200
KFC Franchisees (AKFCF)	$1,100	$150	600
Subway (NAASF)	$650	$0	4,000
Franchisees & Dealers, AAFD	$300	$0	400
Coalition of Franchisee Assns	-	$20	8
International Assoc., IAFD	-	$0	3

It is not a complete list. Although 130 of an estimated 250 franchisee associations in the U.S. are listed in Franchipedia, a social media-based wikipedia for the franchise industry, many remain in the background, unnoticed by almost all.

Survey sources

The Asian American Hotel Owners Association (AAHOA) and the International Franchise Association (IFA) provided numbers to Blue MauMau. A representative for the National Automobile Dealers Association (NADA) provided guidance. The numbers for all other groups were much harder to obtain and are this journal’s best guess, with the help of group and industry insiders. The revenues and paid members are for 2009. PAC money is for the end of the last election cycle, 2008.

Franchise associations range from representing franchising firms, like the International Franchise Association largely does, to those who solely represent owner-operators under a single brand, like the National Franchisee Association, which represents Burger King franchisees.

Read More at: BlueMauMau

7-Eleven Franchisees Descend On Hill To Battle Credit Card Swipe Fees

Ryan Grim writes at the Huffington Post that Navdeep Bassi is tired of sending money to Wall Street for nothing. Over the past year, the owner of four 7-Elevens in Orange County, California, has been haranguing his customers about the swipe fees he is forced to pay big banks and major credit card companies, asking them to sign a petition in opposition to the fees.

“When we told them how much we pay, they are very supportive,” Bassi said as he crossed Constitution Avenue, headed for the U.S. Capitol on Thursday morning. “They keep coming back to us, asking us what is happening.”

Bassi may have good news for his customers when he returns. What is happening is that a coalition of merchants are on the brink of defeating the combined lobbying muscle of Wall Street, community banks and credit unions, which enjoy a system that functions to skim the profits from small businesses across the country.

Bassi convinced 6,000 people to sign on in the store where he works most often. His four stores combined collected 11,000 signatures. In September, the merchants coalition delivered 1.7 million signatures to Washington, said Keith Jones, a top 7-Eleven lobbyist, who is escorting Bassi and two fellow 7-Eleven franchisees around the halls of Congress Thursday following a rally of more than 100 small business owners from across the country. Bassi, said Jones, pulled in more signatures than any other merchant.

The small businessmen have flown in to urge Wall Street reform conferees to support the Durbin-Welch amendment, which aims to rein in excessive debit and credit card fees. It passed with broad bipartisan support in the Senate and has solid support among House conferees, despite fierce bank opposition. The small businesses are aligned with big businesses such as Walmart, which pays out millions in fees. Big governments get cleaned out, too. A U.S. Treasury report earlier this week showed that the federal government loses more than $116 million a year in swipe fees for credit and debit card purchases. State and local governments spend millions more for nothing. Advocates of reform say that Wall Street has persuaded the smaller banks and credit unions to do their bidding on this issue, knowing that their reputation is toxic; the small banks say they’re working for their own benefit.

HuffPost checked back in with Bassi in the afternoon. “Meetings are doing very well. We’re getting very good response,” he said. The word is, he said, that a vote could come as early as Tuesday. 7-Eleven helped fund his trip to Washington, said Bassi, but he still spent about $1,500 out of pocket for the trip, he said. That’s chump change if Bassi can win this fight — he pays about $40,000 a year on swipe fees, he said.

Steve Verdier, a lobbyist with the Independent Community Bankers Association, told HuffPost that a Tuesday vote certainly seemed possible. “We are working it hard,” said Verdier after meeting with House Majority Leader Steny Hoyer (who didn’t indicate to the lobbyists were he stood). The merchants, said Verdier, are being disingenuous to portray it as a David versus Goliath struggle.

“Here it’s a question of merchants or banks. It’s big-box merchants against community banks in many cases,” he said, arguing that the fees aren’t excessive. “The fees are our cost of doing business. A lot of the costs are about maintaining the network and guarding against fraud.”

Read more at the Huffington Post

Tight Credit Is Turning Franchisers Into Lenders

Kermit Pattison writes in the New York Times that Mr. Tessier had owned a liquor store for nearly a decade. He had a good credit score and a solid track record as a businessman in central Georgia. He assumed lenders would be happy to help. “I went to several banks and they acted like they could do loans,” Mr. Tessier said. “But when it came down to it, it was ridiculous. Ultimately, the terms and conditions were just outrageous.”

So Mr. Tessier turned to another source of capital, his franchiser. He financed the $250,000 cost of opening his pizza restaurant though a leasing program established by Marco’s Pizza to help franchisees unable to obtain traditional loans. The case is one example of a trend that is rattling the chains of franchising: facing a $3.4 billion credit shortfall, franchisers are trying to spur growth by offering franchisees new financing approaches and incentives.

“When you talk to anybody in the franchising industry, financing is the No. 1 concern,” said Sean Fitzgerald, vice president for franchise development at Wireless Zone, a cellphone retailer that has introduced in-house financing programs to cover part of its franchise fee and opening costs. “And it’s not going to get better anytime soon.”

Chains are facing the worst credit squeeze since the franchise model boomed in the years after World War II. This year, the franchise industry is expected to seek $10.1 billion in capital, but banks are expected to lend only $6.7 billion, according to the International Franchise Association.

The big national companies that dominated franchise lending before the 2008 collapse have stopped or reduced financing. The remaining lenders — often local banks — have been more restrictive in their credit underwriting, and they have been demanding more collateral (like home equity), more cash liquidity, more experience in the industry and outside sources of income, like rental income or a working spouse.

“Banks have hit the reset button,” said Reginald Heard, president and chief executive of Bankers One Capital, a company in Danbury, Conn., that specializes in financing franchises. “They’re just holding onto capital and being conservative on how they approach new deals going forward. The franchisee who left I.B.M. and now wants to open a Dunkin’ Donuts or Subway, those deals are a lot more challenging to get done.”

Robert C. Seiwert, senior vice president of the American Bankers Association, said the tighter credit standards affected first-time franchisees in particular (especially those trying riskier ventures like restaurants). Beyond the concerns about lacking collateral, experience and cash flow, lenders are often wary of franchisees who are unable or unwilling to make a large equity investment in their business. And lenders are likely to be especially cautious with newer chains that lack a track record.

That is why the franchisers are getting involved, Mr. Seiwert said. “Financing for franchisees has always been tough,” he said. “But in today’s economy, it’s even tougher.”

Some franchisers have gone a step further and put their own balance sheets to work by creating captive financing programs, pooled credit support or leasing programs. Others have tried “credit enhancement” in which the franchiser guarantees part of a loan to encourage tight-fisted lenders to free capital. Some franchisers are submitting themselves to the bank credit report process — essentially getting their credit-risk language translated into banking terms — so that franchisees have a lender-friendly package ready to take to banks that might have never seen a loan application from a particular chain.

Besides financing, many franchises have also taken steps to help potential franchisees by reducing fees, waiving royalties or reducing square-footage requirements. Whatever the tactic, the motive is the same: playing a more active role in helping franchisees gain access to capital. “We had to get into the financing space to be able to deliver a solution to our franchisees,” said Peter Taunton, founder and chief executive of Snap Fitness, a national gym chain based in Chanhassen, Minn.

Read more at: New York Times

IFA Names Caldeira President, CEO

Denny’s Franchisee Association Intends to Take Legal Action Against the Committee to Enhance Denny’s For Illegal Use of Confidential Documents

From BusinessWire in regard to the Denny’s Corporation proxy contest, the Denny’s Franchisee Association (“DFA”) released the following letter to the Committee to Enhance Denny’s (the “Committee”) notifying the Committee of its intent to pursue legal action in response to the Committee’s apparent wrongful appropriation and fraudulent use of certain confidential DFA documents.

W. Craig Barber, Chairman of the DFA stated, “This is a very serious and troubling matter. The DFA Board is committed to protect our Association and its members along with the integrity of internal processes under which we operate to serve the best interests of our members and the Denny’s Brand. It is startling for a group proposing election to a public company board of directors to demonstrate questionable ethics and judgment by not only obtaining and distributing confidential documents, but misrepresenting them in an effort to further its own interests. We believe investors should evaluate their conduct carefully and consider whether such actions are in the best interests of the Brand, and therefore the stakeholders of that Brand. The DFA Board is committed to take all actions necessary to protect the legal rights and interest of the members of the DFA along with the Association itself.”

A copy of the letter follows:

May 13, 2010

Committee to Enhance Denny’s

c/o David Makula

Oak Street Capital Management, LLC

111 S.Wacker Drive, 33rd Floor

Chicago, Illinois 60606

Re: Release of Confidential Materials

To Who it May Concern:

This firm represents the Denny’s Franchisee Association. It has come to our attention that your group, Dash Acquisitions, Oak Street Capital Management, or Mackenzie Partners, Inc., have come into the possession of certain confidential documents, including but not limited to two particular memorandums – one being a draft of an operating agreement for system-wide advertising funds [OPERATING AGREEMENT-Revised 3-28 Ver 3.doc] and the other being a draft of guiding principles for supply chain effectiveness [Denny's Supply Chain 42810.doc.] These documents contain confidential, proprietary information which is protected by the attorney-client privilege and work-product doctrines. The release of such documents and the information contained therein by any of the entities involved with the Committee to Enhance Denny’s without obtaining a proper waiver or consent from the Denny’s Franchisee Association would represent a breach of these privileges. Further, the release of any such documents or information therein would represent intentional interference with a business relationship. Finally, depending upon the means by which this documents and information was obtained, the actions of the Committee to Enhance Denny’s, Dash Acquisitions, and/or Oak Street Capital Management may have violated the provisions of the Electronic Communications Privacy Act, 18 U.S.C. 2510, et. seq.

I am writing to inform you that the Denny’s Franchisee Association intends to pursue immediate legal action against any individual and/or entity that releases or has released confidential materials without its express permission. All such documents in your possession should be returned to this office immediately and all parties should permanently delete any electronic files related thereto.

Sincerely,

John W. Lewis

JLewis@lewisking.com

SOURCE: Denny’s Franchisee Association
Denny’s Franchisee Association
W. Craig Barber, 615-277-1212

Denny’s Shareholder Battle Boils Over

Nation’s Restaurant News reports that the bitter proxy fight for control of three seats on Denny’s board of directors comes to a head Wednesday at the company’s annual meeting, the parent of the 1,500-unit family-dining chain has said the tactics employed by the dissident investor group to shake up management have alienated franchisees and could hurt business.

Denny’s franchisee association has even said it may take legal action should confidential corporate documents containing operational practices and agreements be disseminated to shareholders by the dissident investor group.

According to Denny’s franchisee association, the investor group — which calls itself the Committee to Enhance Denny’s and owns 6.5 percent of the Denny’s shares — has inappropriately obtained confidential documents related to the brand’s advertising funds and supply chain. The association said it would use legal action to stop any publication of those documents.

The investor group said in a statement that the documents were lawfully obtained and all allegations “are without foundation.”

Denny’s Corp. weighed in as well.

“As an 85-percent franchised restaurant company, Denny’s success is completely intertwined with the success of its franchise partners and it is critical that we have a strong and trusting relationship with them,” Debra Smithart-Oglesby, Denny’s board chairman, said in a statement this week. “The dissidents’ tactics have more than crossed the line and done significant harm to that relationship and they now threaten to do serious damage to the company and its prospects moving forward.”

“This is a very serious and troubling matter,” W. Craig Barber, chairman of Denny’s Franchise Association, said in a statement. “The DFA board is committed to protect our association and its members along with the integrity of internal processes under which we operate to serve the best interests of our members and the Denny’s brand.

“It is startling for a group proposing election to a public company board of directors to demonstrate questionable ethics and judgment by not only obtaining and distributing confidential documents, but misrepresenting them in an effort to further its own interests,” he continued in the statement. “We believe investors should evaluate their conduct carefully and consider whether such actions are in the best interests of the brand and therefore the stakeholders of that brand.”

The investor group urged shareholders to “ignore this last minute scare tactic and misdirection being used by the Denny’s board in its desperate attempt to entrench itself in the face of this election contest.”

The investor group, which includes Oak Street Capital Management and Dash Acquisitions, has nominated three executives to Denny’s board. The investors are seeking to remove Smithart, Denny’s chief executive Nelson Marchioli, and former chairman Robert Marks and replace them with members of their own investor group.

Read more: http://www.nrn.com/breakingNews.aspx?id=383206&menuid=1368#ixzz0ojkD68rq

Have It Whose Way: Franchisees or Franchisor?

Richard Gibson reports in the Wall Street Journal that a letter to Burger King Holdings Inc.’s board bristled with anger and frustration.

“Gentlemen, frankly, our business is in deep trouble,” it warned, pointing to what it called “two ill-conceived decisions” by the chain’s management that “violate the rights of our Franchisees and harm our business…. Your management team has pushed the Franchise Community to the brink.”

Signing the letter were all 21 directors and six officers of the Burger King National Franchisee Association Inc., which represents most of the brand’s independent restaurant operators. Twelve days later, Burger King’s board sent out a letter—addressed not to the association but “Dear U.S. Franchisees”—expressing “full and unanimous support” of top management and contending that operationally and financially, the brand was “in a much better position…than it was six years ago when we hired this management team.”

That exchange last November encapsulates a power struggle that has been roiling the approximately 12,000-unit restaurant chain for nearly six years. The franchisee group argues that management has hurt store owners with its marketing strategies and other moves. Management has distanced itself from the association and replaced franchisee advisory committees, which had given franchisees a big say in business decisions. The company also accused the group, in a letter to its leadership, of hampering brand-building efforts.

Relations became so antagonistic that last year the association took the extraordinary step of filing two class-action lawsuits challenging management decisions. One suit, filed in U.S. district court in San Diego, came after the company sought to divert to national advertising millions of rebate dollars that franchisees get from Coca-Cola Co. and Dr. Pepper Snapple Group Inc. for selling their beverages. That suit was dropped after the company agreed to augment its ad budget by other means.

The other association suit opposed a company mandate that franchisees sell a double cheeseburger for $1. That suit, still pending in federal district court in Miami, contends that management can only suggest prices franchisees charge. Franchisees had voted down the proposed sandwich, arguing they would lose money at $1, but Burger King introduced it anyway. In court papers, the company argued that an appeals-court ruling in another suit involving pricing gave it the right to make the move. Since the filing, Burger King has taken the double cheeseburger off its $1 Value Menu, and raised its suggested price, but announced plans to add more items to that menu.

Burger King also faces a suit brought by three franchisees—two are in the company’s Hall of Fame for exceptional franchisees—challenging a mandate that they keep their restaurants open late at night. It “costs franchisees $100 an hour, but they gross only $25 to $30 an hour,” says Robert Zarco, a Miami attorney representing the plaintiffs. The two sides are awaiting a hearing on the company’s motion to dismiss that litigation, which was filed in Dade County Circuit Court in Florida in December 2008.

The company filed a spate of suits earlier this year as well—some threatening to default franchisees who the company says haven’t upgraded their checkout terminals as quickly as management wanted.

A spokeswoman says Burger King doesn’t comment on pending litigation. As for its relations with franchisees, and their complaints, the company didn’t make senior executives available for interviews but says it “maintains open and direct communication with our franchise system, including dialogue with the leadership of both the national and regional levels of the National Franchisee Association.” And in an email, Burger King’s North American president, Chuck Fallon, wrote, “We remain wholly committed to finding innovative ways to work collaboratively with the entire system to enhance our brand positioning around the world.”

During a recent presentation at a Morgan Stanley investors conference, Mr. Fallon said, “We have put our best foot forward over the last six months to try to improve that relationship” with franchisees. He alluded to “mistakes we’ve made over the year, and are working our tails off to try to improve those relationships…. We’ve been on a very active campaign to be more effective at communicating, collaborating with our franchisees, explaining the why behind the what.”

Asked about reconciliation prospects, franchisee-association Chairman William Harloe Jr. said in an email, “Our doors are always open.”

While squabbles between a franchiser and its franchisees aren’t uncommon, those at Burger King are notably bitter, and have drawn Wall Street’s attention. Citing the continuing hostilities, two brokerages have downgraded Burger King’s stock. “Tensions with franchisees will limit franchisees’ willingness to make the investment [in remodeling] for their stores,” Credit Suisse said in changing its rating to “neutral” from “outperform” in January. In cutting its rating that same month, to “perform” from “outperform,” Oppenheimer & Co. said among other things that relations between management and franchisees had “soured markedly.” The stock trades about 20% above its $17 initial public offering price four years ago.

The genesis of the difficulties is partly rooted in the chain’s historic structure. About 90% of Burger King restaurants are franchisee-owned and operated—a higher percentage than many franchises. Over the years, that gave franchisees outsize influence, several former executives say. In the 1990s, for example, franchisees helped rewrite Burger King’s franchise agreement—a document that was widely copied in the industry.

Still, even as franchisees’ power grew, cracks began to appear in the relationship with management. Since 1989, for instance, the chain has had 10 chief executives. The executive suite’s revolving door bred wariness and uncertainty among franchisees over management’s priorities, operating style and expectations, several veteran franchisees say.

Presiding over a large franchisee community can pose unusual management challenges. Burger King’s franchisees are diverse, ranging from third-generation operators to those new to the system, from passive participants to outspoken activists. Also in the mix are a few franchisee companies with dozens of restaurants—unusual in franchising.

In 2001, franchisees, who openly expressed criticism of the way then-owner Diageo PLC was managing the brand, pushed hard for the chain’s sale. Early on, some retained an investment banker to pursue a possible buyout of the fast-food chain by them. Eventually, three Wall Street private-equity investors—Goldman Sachs Group Inc.’s GS Capital Partners, TPG Capital, and Bain Capital LLC—stepped in to acquire the business for $1.58 billion. (Burger King’s revenue in fiscal 2009 totaled $2.5 billion.)

Read more at: The Wall Street Journal

Burger King franchisees fight to have it their way

Elaine Walker reports in the Miami Herald that the fight over Burger King’s $1 double cheeseburger landed in court, in a debate over whether the fast-food chain has the right to set pricing.

Burger King asked U.S. District Judge K. Michael Moore on Thursday to dismiss the class-action lawsuit filed by franchisees over the $1 double cheeseburger.

Miami attorney Michael Joblove argued that the issue of Burger King’s right to set maximum pricing was already decided last year in a ruling by the U.S. Court of Appeals in the 11th Circuit.

In that case the court ruled there is “simply no question that BKC had the power and authority under the Franchise Agreement to impose the Value Menu on its franchisees.”

“There is sound business judgment behind this,” Joblove argued Thursday in Miami federal court. “It’s not capricious. We’re responding to the competition. Everyone is out there with $1 products.”

Burger King’s National Franchisee Association filed suit last November in Miami over the $1 double cheeseburger, arguing that the company does not have the authority, under the franchise agreement, to “dictate maximum pricing.”

“We’re asking the court to declare the meaning under the contract,” said Paul Reynolds, a San Diego attorney representing the franchisees. “In our view it’s unambiguous in our favor.”

Moore did not rule Thursday on whether to dismiss the case.

Burger King franchisees have argued that the company only has the right to recommend pricing and it is the independent franchisees who set their own prices. Franchisees had twice voted down the $1 double cheeseburger before Burger King insisted on introducing it nationally.

The suit, which seeks class-action status, came after Burger King started requiring all franchisees to sell the double cheeseburger for $1. They claimed the item was costing them money, dragging down the average check and restaurant profitability.

As of April 12 Burger King allowed franchisees to raise the price of the double cheeseburger to as high as $1.29.

Burger King’s attorney also argued Thursday that the National Franchisee Association does not have the standing to bring a class-action lawsuit against the Miami-Dade fast-food chain. Joblove said the case would require individual franchisees to demonstrate they incurred losses selling the $1 double cheeseburger. Burger King’s fixed costs on the product give a profit margin of about 40 percent, he said.

But Reynolds argued that franchisees were concerned they might get “retaliated” against by Burger King for testifying as individuals.

“The claim is not an attempt to recoup losses,” Reynolds told the court.

Read more: Miami Herald

CKE Restaurants to Be Acquired by Apollo Affiliate

Bloomberg BusinessWeek reports that CKE Restaurants Inc., operator of the Carl’s Jr. and Hardee’s fast-food chains, said it will sell itself to an affiliate of Apollo Management LP for $12.55 a share in cash, or about $694 million.

CKE terminated a previous merger agreement with affiliates of Thomas H. Lee Partners LP, it said in a statement today. THL Partners, which owns a stake in Dunkin’ Brands Inc., had offered $11.05 a share.

CKE said on April 7 it had received a rival proposal from a then-unidentified bidder that may top the bid it had accepted from THL Partners in February. The acquisition by Apollo affiliate Columbia Lake Acquisition Holdings Inc. shows private equity firms are interested in restaurant chains because of their relatively low debt and good cash flow, said R.J. Hottovy, a restaurant analyst at Chicago-based Morningstar Inc.

Apollo spokesman Charles Zehren declined to comment. CKE spokeswoman Beth Mansfield and THL Partners spokesman Matt Benson didn’t return messages left after-hours at their offices.

CKE has 3,141 restaurants in 42 states and 14 countries, including 1,224 Carl’s Jr. restaurants and 1,905 Hardee’s sites. Founder Carl Karcher borrowed $311 to buy a Los Angeles hot-dog cart in 1941 and became a pioneer in the industry, introducing salad bars, char-broiled chicken-breast sandwiches and self- service beverage stations. He died in 2008.

Related reading at DDIFO.org: CKE Reastaurants Says New Takeover Bid is Better  

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