Debt on the Menu at Burger King

Steve Rosenbush writes at Portfolio.com here’s something for Burger King Franchisees to consider as the restaurant chain is sold to yet another private equity owner. Who will pay for the $2.8 billion in bank loans that are financing the buyout, worth an estimated $4 billion, including debt and equity?

3G Capital, a heretofore obscure investment company with holdings in CSX and Coca-Cola Bottling, is offering $3.26 billion for the company, a 46 percent premium to its pre-announcement market price. The new owners are taking on Burger King’s existing debt, bringing the total cost of the deal to $4 billion. About $2.8 billion will be financed with bank loans. 3G is run by Brazilian billionaire Jorge Paulo Lemann, a veteran of private equity firm GP Investments, America Latina Logistica, and Anheuser-Busch, where he has a seat on the board.

Burger King has been fried by the recession. It has gone through a series of ownership changes since 2002, when private equity players TPG, Goldman Sachs and Bain bought the company from British booze giant Diageo.

It went public in 2006, although the private equity group still holds nearly one third of the shares.

Those three private equity companies—regarded as among the best in the business—have failed to prevent a decline at Burger King. The recession has hit its core customers, who are in their late teens to early 30s. Revenues are down about 1 percent, while McDonald’s has a broader menu, double digit revenue growth, and a market cap of $80 billion.

Burger King is in need of new technology, a facelift for its aging stores, and probably an overhaul of its menu and general strategy. Its marketing campaign—featuring a bizarre-looking character—probably hasn’t helped, either. Needless to say, relations with franchisees could be better.

It’s not clear what 3G will bring to the table, so to speak. It once had minor holdings in Wendy’s and Jack in the Box, but that’s not the same thing as financial control, let alone operating responsibility.

What is clear, is that that debt is on the rise. It appears that less than $500 million of equity will go into the deal. That’s less than 20 percent of the purchase price, and about 12.5 percent of the value of the deal, including the assumption of existing debt. The economy remains weak. Any turnaround will require investment in the business.

Debt is cheap right now, and if the new owners can raise enough, they stand to make a profit by acquiring the company now, when equity values and interest rates are low.

But they need a great strategy to turn around sales and position the company for an upturn in the economy. That isn’t clear. What is clear is that the restaurants will have to support a higher level of debt.

Portfolio.com

A Whopper of a Decision: Burger King Franchisee Association Has Standing

Eric H. Karp

David J. Meretta

From time time DDIFO is pleased to present Guest Commentary from valued contributors. The following is an Analysis of  a recent 11th District Court Decisions regarding Burger King written and submitted by Eric Karp and David J. Meretta of 

Witmer, Karp, Warner & Ryan LLP  

22 Batterymarch Street,  Boston, MA 02109 Tel: 617-423-7250

Following the Supreme Court’s holding in State Oil Co. v. Khan, 522 U.S. 3 (1997) that maximum price fixing was no longer a per se antitrust violation, some franchisors have imposed deep discounting on their  franchisees through resale price caps.  Among the better known examples of this are the “value menu” pricing systems adopted by many fast food franchisors in which all designated  ”value” items must be sold at or below a specified price.

In certain instances, franchisees have embraced such maximum pricing caps, particularly where those schemes have maintained or actually increased the franchisees’ bottom line profitability.  Where pricing restrictions are viewed by franchisees as harmful to their profitability, however, substantial system discord and even litigation can ensue.

A fascinating recent example of the latter scenario can be found in National Franchisee Association v. Burger King Corp., 2010 WL 2102993 (S.D.Fla. 2010), which concerns Burger King’s system-wide $1 double-cheeseburger (DCB) promotion.  This case epitomizes the collision between the divergent interests of franchisors, for which the top-line revenue of the franchisees is paramount, and franchisees, who live off the bottom line.

The DCB promotion has long been the subject of heated debate between Burger King and its franchisees, which maintain that because it costs more than $1 to produce the DCB – something that is not true of any other item previously placed on the Value Menu – the promotion requires them to sell the DCB at a loss and could lead to bankruptcy of some franchisees.  The franchisees were also mindful that Burger King’s marketing of the DCB promotion was being funded by the franchisees’ advertising contributions.  Burger King’s decision to implement the promotion in the fall of 2009 marked the first time that it had imposed a maximum price on its franchisees without obtaining their majority consent, the franchise community having twice voted against it. 

In November 2009 the National Franchisee Association (NFA), which consists of approximately 83% of all Burger King franchisees in the United States and Canada, filed suit against Burger King in federal court in Florida.  The NFA alleges that (1) Burger King does not have the right to set maximum prices under the franchise agreement, and (2) the DCB promotion violates Burger King’s duty of good faith under both the express terms of the franchise agreement and the implied covenant of good faith and fair dealing under Florida law.

In response, Burger King moved to dismiss the complaint, challenging the NFA’s standing to sue on behalf of individual Burger King franchisees, and arguing that the Eleventh Circuit had previously confirmed Burger King’s authority to set maximum prices under the franchise agreement.

While the court agreed that it was bound to follow the previous Eleventh Circuit determination that Burger King does have the right to set maximum prices under the franchise agreement, the court declined to deny the NFA standing to bring its action at the current stage of the litigation, and it ordered that the case proceed with respect to the NFA’s claim that Burger King’s decision to impose the DCB promotion violated its contractual or implied duty of good faith.  Both aspects of the court’s decision are significant.

In reaching its decision, the court noted the longstanding principle that an association has standing to sue on behalf of its members when: (a) its members would otherwise have standing to sue in their own right; (b) the interests it seeks to protect are germane to the organization’s purpose; and (c) neither the claim asserted nor the relief requested requires the participation of individual members in the lawsuit.  In this case, Burger King challenged the NFA’s associational standing with respect to the first and third elements.

The court rejected Burger King’s arguments that the NFA’s standing is contingent upon (i) all Burger King franchisees being members of the NFA, and (ii) the identification of an individual franchisee that has standing.  Observing that the NFA brought the action “on behalf of its members and on behalf of a class comprised of all the Franchisees”, the court found that, at the current stage, the action is only on behalf of NFA’s franchisee members and would only be extended to all Burger King franchisees should the NFA succeed in certifying a class.  The court likewise found that the allegation that “at least one” NFA member would be harmed by the DCB promotion satisfied the first element of associational standing.

With respect to the third element of associational standing, the NFA maintained that the participation of individual franchisees in the lawsuit is unnecessary, because the NFA could prove bad faith through Burger King’s own internal documents and data, and through expert testimony.  The court agreed and concluded that the NFA had sufficiently alleged associational standing at this early stage of the litigation.  The court cautioned, however, that because of the nature of the NFA’s claims, it must prove, on a franchisee-wide basis, that Burger King imposed the DCB promotion in bad faith, and “it remains to be seen” whether the NFA can prove such bad faith “without resort to individual determinations”.

Burger King’s duty of good faith to its franchisees is both contractual and implied by law.  The franchise agreement provides that Burger King can only make changes and additions to its operating system which Burger King “in the good faith exercise of its judgment believes to be desirable and reasonably necessary . . .”  Toward this end, under Florida law, the implied covenant of good faith and fair dealing prevents a party from capriciously exercising discretion accorded it under the contract “so as to thwart the contracting parties’ reasonable expectations.”

Addressing the NFA’s claim for breach of the duty of good faith and fair dealing, the court found that, construed in a light most favorable to the NFA, its allegations plausibly state a claim that Burger King breached its duty of good faith by setting the maximum price at $1, forcing the franchisees to sell the DCB at a loss. The court also noted the NFA’s allegation that Burger King has admitted that the sale of the DCB at $1 could lead to bankruptcy of its franchisees.

In our view, in addition to demonstrating the perils of implementing key system changes in the absence of franchisee buy-in, this case should serve as a lesson to franchisors that this kind of overreaching rarely survives legal challenge.  Can it really be good faith to require that franchisees sell a key product at a loss?  Would Burger King, if it was a chain comprised solely of company owned outlets, impose this promotion on itself?  Toward this end, we note that in April 2010 Burger King removed the DCB from its $1 value menu and re-priced it at $1.29.  This step has not eliminated the controversy, however, as Burger King now requires the sale for $1 of the “Buck Double” – which differs from the DCB only in that it has a single slice of cheese instead of two – a product that, according to the franchisees, still costs more than $1 to produce.

The case also serves as validation of franchisee associations in general and confirms, contrary to the statements of some franchisor advocates, that the implied covenant of good faith and fair dealing is very much alive and well.

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.

McDonald’s May Sales Up

McDonald Corporation’s (MCD: 69.16 -0.21 -0.30%) comparable sales are on the rise. Although diners are now more comfortable spending as the economy eases, but they are still seeking value menu offerings. The fast food restaurant operator has witnessed an uptrend across its domestic and international markets.

Global comparable-store sales climbed 4.8% in May 2010 compared to an increase of 5.1% in the same month last year. McDonald’s stated that system-wide sales at worldwide restaurants surged 5.5% or 6.2% in constant currencies in the month under review.

The world’s largest hamburger chain, McDonald’s, said that the new menu offerings, which include value-based drinks, Shrek-themed Chicken McNuggets and addition of Frappes to its McCafe premium coffee line-up, along with Happy Meals promotion have helped boost the U.S. comparable-store sales. McDonald’s said that the U.S. comparable sales grew 3.4% in May (versus a 2.8% increase last year for the comparable month).

McDonald’s closest competitor Burger King Holdings Inc. (BKC: 18.96 -0.06 -0.32%) also announced recently that it expects unfavorable foreign exchange rates, primarily related to the Euro and British Pound, to impact earnings for the fourth quarter of 2010 by 1 to 2 cents per share. For the full year, currency exchange translation is expected to have a neutral to a slightly negative effect on earnings.

 Read More at: Daily Markets

Seattle’s Best Looks for Franchise Chains

Blue MauMau reports that Seattle’s Best Coffee unveiled a new logo and brand strategy on May 11 in an effort to reinvent itself. Part of Starbucks Corporation (NASDAQ: SBUX), the company wants to explode its brand onto the retail scene through high-profile franchise chains and retailers, expanding from 3,000 points of distribution to more than 30,000 by September.

“We are setting out to turn the traditional coffee model on its head with innovative new approaches in every phase of our business – partnerships, retail, and packaged goods – and taking our premium coffee to the places our customers go in their everyday lives,” said Michelle Gass, president of Seattle’s Best Coffee.

Seattle’s Best Coffee will be offered at all Burger King’s 7,250 restaurants in the United States by September. Jenny McCabe, director of communications for Seattle’s Best, says the coffee company chose Burger King as an outlet because the chain helped raise the profile of their beverage, making it more accessible than ever before. “For the September rollout, Burger King will only carry Seattle’s Best Coffee,” says McCabe. She adds, “Consumers will have the option to add vanilla, mocha flavors or whipped toppings. The new coffee will be 100% Arabica beans.”

In April, the Subway sandwich chain rolled out a breakfast menu in more than 23,000 of its U.S. stores that featured Seattle’s Best. These new relationships join Seattle’s Best Coffee’s growing roster of partners, which includes non-franchising retailers like Borders bookstores and AMC Theatres, among others.

“Our new brand identity was inspired by the history of the Seattle’s Best Coffee culture, one of optimism and fun,” said Gass.  “The new brand direction will bring a simplified approach to the coffee category in all the ways it will touch the customer.”

The Seattle’s Best Coffee logo’s reinterpretation maintains the brand’s historic association with its name and the color red while assembling a number of universal coffee symbols, such as a drop and a cup, in an unexpected way. The new logo was designed by Creature, an independent brand and advertising agency based in Seattle.

“Our ambitions for the new Seattle’s Best Coffee brand are as significant as our aspirations to become a multi-billion dollar business, and we designed the new logo to one day become a universally recognized and reassuring symbol for great tasting coffee everywhere,” said Gass.

McCabe adds that key franchise and retail brands will help them accomplish this. “The company is currently looking at a diverse roster of partners to ensure that it is truly making great coffee accessible everywhere,” she says.

Read mote at: Blue MauMau

Court: Burger King Can Set Prices

Burger King Holdings Inc. won dismissal of part of a lawsuit brought by franchisees over the $1 double cheeseburger promotion, but a Miami court will hear arguments on whether the company acted inappropriately in implementing the deal.

On Thursday, U.S. District Judge K. Michael Moore ruled that Burger King can set maximum prices that franchisees must follow, a victory for the parent company.

But the franchisees said they scored some wins as well.

The court will now hear arguments on the franchisees’ claim that Burger King acted in bad faith in implementing the $1 double cheeseburger promotion, which many franchisees said forced them to sell the double cheeseburger at a loss.

Related reading at DDIFO.org: Have It Whose Way: Franchisees or Franchisor?  Burger King franchisees fight to have it their way

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

BK Wages Breakfast War on McDonald’s With New Sandwich

Rupal Parekh of Advertising Age reports that Burger King is betting big on breakfast with a new national blitz to promote a morning sandwich that’s admittedly a lot like McDonald’s Egg McMuffin, but cheaper.

In a new 30-second commercial from agency Crispin Porter & Bogusky, BK’s mascot, the King — armed with a flashlight and donning a hoodie — breaks into McDonald’s headquarters in the wee hours of the morning to copy the recipe for McD’s Sausage McMuffin with Egg sandwich. A voice-over says, “It’s not that original but it’s super affordable … egg, sausage and cheese on a toasted English muffin.” (The sandwich is being sold for a $1 at Burger King restaurants. McDonald’s doesn’t offer that sandwich on its breakfast dollar menu, but it does offer other selections, such as a sausage biscuit and sausage burrito).

McDonald’s doesn’t seem to be ruffled by the comparative ad or use of its brand in Burger King’s commercials. “Imitation is the sincerest form of flattery,” a spokeswoman told Ad Age in an e-mail. “As always, McDonald’s continues to focus on its business and customers.”

It seems to be the first time that Burger King has shown a likeness of the Golden Arches in its ads, but not the first time McDonald’s imagery has made its way into a BK commercial. In July 2008, spots from Crispin showed a couple of young guys wearing Whopper Jr. and Chicken Sandwich getups trying to go into an actual McDonald’s location only to get kicked out.

BK’s breakfast assault

Watch the Ad:

The latest campaign comes as Burger King prepares to take direct aim at McDonald’s breakfast offering — a segment that the Golden Arches has long dominated and that accounts for McDonald’s most-profitable meal. In addition to the new muffin sandwich, which will likely supplant the Croissanwich, BK has launched a major breakfast assault with a series of product introductions such as the BK Breakfast Bowl for $2.79 and has added Seattle’s Best Coffee to its menu, replacing coffee provided by Sara Lee Corp. The chain is expected to be making these new products available ahead of a more comprehensive U.S. breakfast platform launching in late 2010.

For fast-feeders in general, breakfast is fast becoming the most competitive day-part, with players such as Starbucks and Subway stepping it up in the space. Subway’s new breakfast menu debuts nationally this coming Monday with customizable omelet sandwiches and combo meals.

According to Gary Stibel, founder-CEO of New England Consulting Group, “the breakfast day-part is very important to the industry and sales and traffic will increase as a result” of increased competition by restaurant chains in the space. Breakfast “has suffered because unemployment is so high,” Mr. Stibel said, noting Americans “are not running out of the house at 7 in the morning, so it hasn’t received the same attention as other day-parts because people aren’t going to work.”

Read more at: Advertising Age

Burger King Still Owes Whoppers of Debt

David Phillips writes at BNET.com  that much has changed in the half century since Burger King (BKC) sold the first flame-broiled Whopper sandwiches from a drive-up hamburger stand in Miami. What remains the same, however, is the fast-food chain’s cycle of running into financial difficulties, restructuring and getting repackaged for resale. Operating results of late suggest that history is still repeating itself.

The latest reorganization could’ve been torn from the playbook of  Gordon “Greed is Good” Gekko: A troika of private equity firms, lead by the likes of Bain Capital and Goldman Sachs Funds, orchestrated a controversial public offering in May 2006 — but not before pocketing more than $700 million in fees and dividends. Financing this avarice was almost $1 billion in debt heaped on the balance sheet inherited by the new shareholders (and the equity funds still own a 32 percent stake, at an essential cost basis of pennies per share).

Unfortunately, like the tenth read of a well-worn novel, the story line doesn’t change. Burger King, the second largest fast food burger chain in the world, has been unable to adjust to the soggy economy as well as competitors such as McDonald’s (MCD). U.S. and Canada comparable sales fell 3.3 percent for the second-quarter ending December 31 due to lower levels of customer spending per transaction (resultant from value promotions liked the $1 ¼ lb. Double Cheeseburger promotion).

Restaurant margins in the all-important North American markets (more than 60 percent of store locations) improved 160 basis points to 14.4 percent in the latest period — but a review of operating results suggests these alleged “operational efficiencies” are temporary, driven by lower commodity costs, from dairy to wheat to fuel.

Management is looking to enhance restaurant profitability by introducing higher-margin products. Good luck to BK as it tries to wean cost-conscious customers from their “value meals,” of which 62 percent pick-up their food via the drive-thu window.

A first-test comes mid-April, when BK plans to raise the price of its popular $1 Double Cheeseburger to $1.19, likely to be followed by a similar hike in the sales price of the signature $1 Whopper Jr. sandwich.

Morning snacking has been growing in popularity, as noted in consultant NPD Group’s 23rd annual Eating Patterns in America . Another tell that trouble is brewing at BK was chief executive John Chidsey’s admission on the second-quarter 2010 conference call that the company has had little success in growing breakfast share among quick service restaurant (QSR) competitors, from McDonald’s to Dunkin Donuts.

Looking to blunt the success of McDonald’s new McCafé line of lattes and cappuccinos, and make inroads of its own with the drive-to-work crowd, BK is adding Seattle’s Best Coffee to its branded beverage platform and breakfast menu. Part of the Starbucks (SBUX) family, the Seattle’s Best agreement calls for the freshly-brewed premium coffee to be marketed in the approximately 7,250 BK restaurants across the United States by September 2010.  Whether this less-known Starbucks brand proves any tastier for profits or traffic compared to the retiring “BK Joe” coffee brand remains to be seen.

Last September, Fitch Rating affirmed its stable BB long-term rating on Burger King’s debt paper, anticipating that “weak top line growth would result in [only] modest additional deterioration in leverage ratios over the near term.”

Read more at: BNET.com

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