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

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.

Policing Private Equity

Portfolio.com reports that regulators, subsumed with banks, hedge funds, and trading, have gone easy on private equity. Disciplining these funds is best left to institutional investors, anyway.

The private equity business is one of a handful of segments of the financial markets that isn’t emerging as a major focus for reform among Washington policymakers. True, there has been some discussion about taxing the industry’s profits at a higher rate, which is moving forward in the House in a proposal by Senator Carl Levin and Senator Max Baucus. But compared with the historic bank regulation that the Senate passed on Thursday, private equity funds and their managers have escaped the populist storm relatively unscathed, even if they will spend much of the next five years trying to refinance hundreds of billions of dollars of debt in a more difficult environment.

The probable reason for this relative immunity is that in their dealings with Wall Street investment banks, it’s more probable that it was the private equity world that took advantage of investment banks like Citigroup or Morgan Stanley rather than the other way around.

Indeed, within investment-banking circles, the biggest buyout shops—Blackstone, KKR, and Apollo—earned a reputation for playing one investment bank against another in quest of the cheapest and largest financing packages. At one point during the height of the frenzy, bankers at Citigroup were trying to find ways to finance a $85 billion buyout, several times the largest such deal ever done, on behalf of one of its clients. “We might have temporarily lost our minds,” admitted one of the bankers involved, after the fact. “But at the time, we knew we couldn’t afford to lose the client’s loyalty.”

Still, just because the private equity business seems to have manipulated Wall Street rather than the other way around doesn’t mean that it should be immune to scrutiny. True, its investors are sophisticated entities—pension funds, college and university endowments, and foundations. Many of them may have been encouraged by the success of early players like Yale’s David Swenson (and the latter’s loud cheerleading for such alternative asset classes) into committing extremely large chunks of their portfolios to the relatively illiquid private equity arena. The appeal was easy enough to understand. At the height of the private equity boom, top quartile firms generated an annualized return of 39 percent, according to the Private Equity Council, an industry group.

A survey last year by Prequin calculated that two out of every five of the largest endowments have allowed or encouraged their allocations to private equity to exceed their targets, signaling a dangerous lack of discipline on the part of those institutions. But that wasn’t because Wall Street misinformed or concealed the true nature of the risks or return characteristics of private equity from these investors, as numerous legal actions now claim was how Main Street homeowners ended up refinancing their homes with toxic mortgages or German banks invested in CDOs.

On the contrary, the terms of the deals being struck by buyout funds at the height of the bubble often were spelled out in newspaper headlines. It was all too clear that these often involved miniscule amounts of equity investment and massive debt loads.

It’s not surprising that those chickens are coming home to roost. In March, Moody’s Investors Service released a much-buzzed-about report, one that aroused the ire of the private equity world from the very first sentence: “Nearly half of U.S. nonfinancial corporates that defaulted in 2009 had private equity sponsors.”

In other words, those debt loads were making it difficult for the companies that had been buyout targets to function and repay that debt in a recessionary environment. One after another well-known companies filed for bankruptcy protection, staggering under the burden of debt loads applied to their operations by new private equity purchasers: Linens ‘n Things, Reader’s Digest Association, Tribune Co. (the publisher of Chicago’s broadsheet daily newspaper.) The bigger the buyout, the more perilous the outcome, Moody’s said, and the debt rating agency pointed to high correlations between low-rated debt issues and defaults, and between buyout-backed companies and low-rated debt issues.

The Moody’s report, coupled with others from the Boston Consulting Group and Standard & Poor’s—all suggesting that the pain isn’t yet at an end—have been met with furious ripostes from those inside the buyout world. The issue under debate appears to be the precise definition of a default: Moody’s lumps negotiated settlements and prepackaged bankruptcies into the default category, while other studies (including one sponsored by the Private Equity Council) argue that it’s inappropriate to include transactions in which bondholders received significant “recovery” levels on their investments.

That strikes StreetWise as debating over how many angels are capable of dancing a creditable flamenco atop the proverbial head of a pin. Rather than debating whether recovering 80 cents on the dollar means a bond didn’t technically default, the private equity industry might well start spending some time revisiting its basic model and questioning its relationships not with Wall Street (which will always bend over backwards to accommodate such lucrative clients) but with their own investors and the management of their portfolio companies they acquire.

Read more: http://www.portfolio.com/industry-news/banking-finance/2010/05/21/policing-private-equity-is-the-job-of-investors?ana=e_pft#ixzz0ojwGCjPP

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  

CKE Restaurants Says New Takeover Bid Is Better

The New York Times reports that CKE Restaurants, the operator of Carl’s Jr. and Hardee’s restaurants said Tuesday that a rival buyout offer from an unnamed bidder was better than the one it had from a private equity firm, The Associated Press reported.

While the company didn’t name the mystery bidder, DealBook reported this month that the unnamed suitor was Apollo Management.

The news sent shares of CKE Restaurants up 82 cents, or 6.8 percent, to $12.81 in midday trading.

CKE said the $12.55 per share each stockholder would receive from the bidder was superior to a prior offer from Thomas H. Lee Partners, the buyout shop that was part of a consortium that bought Dunkin’ Brands in 2006.

CKE accepted Lee Partners’ offer of $11.05 a share in February. That offer includes about $619 million in cash and approximately $309 million in debt. But CKE said that it notified Lee Partners on Monday about the rival bid and that it planned to terminate its existing agreement based on what it felt was a superior proposal.

CKE is obligated by its existing deal with Lee Partners to talk to the firm for four business days about the offers in case Lee Partners wants to revise its bid. If a new agreement isn’t reached, CKE will send Lee Partners a notice that it is ending the existing deal in favor of the other bid.

 The New York Times

Other realted reading at DDIFO.org: CKE Has Better Offer From Apollo and Other Buyers Interested in CKE and Carl’s Jr. Owner CKE Bought by Thomas Lee Partners

Dunkin’ Vet Will Kussell Joins Advent International

Will Kussell has joined Advent International as an operating partner. He previously was president and chief brand officer of Dunkin’ Donuts Worldwide.

Advent International, the global private equity firm, today announced that Will Kussell has joined the firm’s Operating Partner Program to advise on global investment opportunities in the retail and consumer sector, with a particular focus on restaurants, health and wellness, footwear and franchisors.

Most recently, Mr. Kussell served as President and Chief Brand Officer of Dunkin’ Donuts Worldwide. In this role, Mr. Kussell oversaw Dunkin’ Donuts’ domestic and international operations, marketing, franchising and new business initiatives.

David Mussafer, Managing Partner and head of Advent’s North American team, said: “We look to our operating partners to help us better understand industry dynamics and provide insights from their experiences as leaders in their industry. The addition of Will to the Operating Partner Program highlights our commitment to identifying and securing experienced talent in our sectors.”

During his 15-year tenure at Dunkin’ Donuts, Mr. Kussell led the successful strategic repositioning of Dunkin’ Donuts to a coffee and bakery segment leader, growing U.S. sales in the process from just over $1 billion in 1994 to more than $5 billion in 2009. Additionally, Mr. Kussell launched the “America Runs on Dunkin’” marketing campaign and established an international growth strategy that led to a 60% sales increase from 2004-2009. Prior to Dunkin’ Donuts, Mr. Kussell served as Reebok’s Vice President of Marketing and as Polaroid’s International Group Product Manager.

“Retail and consumer is a core investment sector for Advent, and Will’s significant experience in these sectors will be key in finding and adding value to our investments,” said Advent Managing Director Steven Collins.

Commenting on his new role, Will Kussell said, “The retail sector is dynamic, and there is considerable potential for investing in and further developing brands in the space. Advent’s reputation as an established global firm with a long history of generating growth and value is a powerful platform to address these opportunities. I am excited to be working with Advent on the development of their retail and consumer portfolio.”

Mr. Kussell is a member of the Board of Directors of Modell’s Sporting Goods. He holds a Bachelor of Arts degree in history and sociology, magna cum laude, from the University of Pennsylvania and a Master’s of Business Administration from Boston University.

Advent Operating Partner Program

Advent’s Operating Partner Program involves business leaders from a range of sectors working as consultants to the firm in a variety of ways: sourcing investment opportunities, assisting with the due diligence process and advising on the strategic and operational development of portfolio companies. The use of operating partners is a fundamental and long-established element of Advent’s highly operational approach to investing. The program currently includes over 70 high-level individuals, many of whom have been involved in multiple Advent investments.

About Advent International

Founded in 1984, Advent International is one of the world’s leading global buyout firms, with offices in 16 countries on four continents. A driving force in international private equity for 25 years, Advent has built an unparalleled global platform of over 150 investment professionals across Western and Central Europe, North America, Latin America and Asia. The firm focuses on international buyouts, strategic repositioning opportunities and growth buyouts in five core sectors, working actively with management teams to drive revenue growth and earnings improvements in portfolio companies. Since inception, Advent has raised $24 billion in private equity capital and, through its buyout programs, has completed over 250 transactions valued at approximately $45 billion in 35 countries. For more information, visit www.adventinternational.com.

Papa Murphy’s Sold to Lee Equity Partners

VANCOUVER, Wash. – April 1, 2010 – New York-based private equity firm Lee Equity Partners has signed a definitive agreement to purchase the nearly 1,200 unit Papa Murphy’s Take ’N’ Bake pizza chain from its current majority owner, Charlesbank Capital Partners. Terms of the deal are not being disclosed. Lee Equity Partners is one of consortium of global private equity firms including Bain Capital Partners LLC, The Carlyle Group that own Dunkin’ Brands, Inc.

Papa Murphy’s said that the transaction will position the company for its next phase of growth, as it continues to seek new franchise owners and open locations, primarily in the Southwestern and Southeastern United States. The deal is expected to close in the second quarter of 2010.

Since Papa Murphy’s recapitalization by Charlesbank in 2004, the take ‘n’ bake pizza pioneer has seen its domestic system-wide sales increase by more than 63%, according to John Barr, Chairman and CEO of Papa Murphy’s. “Charlesbank has been a great value-added partner, and I credit much of our strong position in the current marketplace to their support over the years,” said Mr. Barr. “This new chapter with Lee Equity will undoubtedly benefit all of the brand’s stakeholders, including our franchisees, employees and vendors. I look forward to working together to provide an even stronger foundation for expansion and profitable growth.”

“John Barr and the management team have done a terrific job developing the company internally and fortifying its industry leadership position and strong franchise network,” said Michael Eisenson, Charlesbank CEO. “This has been a rewarding investment for us, and we look forward to a very successful partnership between the company and Lee Equity Partners as the management team continues to execute their strategy for growth.”
Thomas H. Lee, President of Lee Equity Partners, said that his organization was impressed with Papa Murphy’s potential for future growth. “This is an outstanding brand with a strong management team. We are very excited about the expansion possibilities into areas of the country where they have little or no presence today.”

Mr. Lee has been involved in a number of high growth consumer-oriented acquisitions, including Snapple Beverage Corp., General Nutrition Companies, PETCO Animal Supplies, Inc., Ghirardelli Holdings Corp., Banana Boat, and Sterling Jewelers, Inc., among others.

Dunkin’ Brands To Gobble Up Kainos Franchise Shops

BlueMauMau reports that Dunkin’ Brands has announced its intent to purchase some of the stores of troubled Kainos Partners Holding Company, a master franchise of 56 Dunkin’ Donuts shops located in New York, South Carolina and Nevada. Dunkin’ will acquire the franchisee’s stores to be owned and run by the franchisor, and then refranchise them later.

In an email sent out to Dunkin’ franchisees, CEO Nigel Travis explained the franchisors intent to buy the company. “Kainos has been unable to emerge from bankruptcy and has filed a motion seeking an order authorizing bidding procedures to be employed in connection with the proposed sale of their Dunkin’ Donuts restaurants and related assets,” Travis wrote. “Dunkin’ Brands has submitted a bid to purchase a substantial portion of the assets and business operations.”

Travis went on to write, “Kainos will continue to operate its Dunkin’ Donuts restaurants in Buffalo, NY, Greenville, SC, and Las Vegas, NV until the conclusion of the sale process.”

Attorney Adam Seigelheim, chair of Stark & Stark franchise group elaborates. “The implication from Nigel’s email is that Kainos is not going to put forward a plan to come out of Chapter 11,” the franchise attorney explains of last Wednesday’s deadline by the court to file a plan and the company’s missing of that deadline. “They’ll remain in chapter 11 but will move to sell off their assets in the ordinary course of business,” says Seigelheim.

Refranchising bankrupt Dunkin’ stores

“Dunkin’ submitted a proposed order to acquire the assets of Kainos under a 363 sale, which is the code section for selling stuff through bankruptcy,” says Jim Balis, who is both chief executive officer and chief financial officer of Kainos Partners.

A “363″ sale refers to a sale of a company’s assets who is undergoing bankruptcy, as in a Chapter 11 reorganization. It refers to the bankruptcy code that regulates the procedure, 11 USC §363.

“I think the order will be entered on Monday (March for that proposed 363 sale, says Balis. “Over the next month, we will be marketing units to see if anybody else is interested to buy the assets of Kainos, the debtor.”

“It looks like they are going to sell off their assets through a liquidated chapter 11,” explains franchise attorney, Adam Seigelheim.

Michelle King, director of global public relations for Dunkin’ Brands, adds, “Other buyers will have an opportunity to purchase the assets of Kainos subject to bankruptcy court approval. Although a final date has not yet been set for completion of the sale, we believe it to be in early April. In the meantime, Kainos will continue to operate in all markets.”

One year’s high flyer crashes the next

Kainos’ Balis says that the original franchise agreement that Dunkin’ required was for Kainos to commit and build over a hundred units in various states. Kainos received development money when credit was flowing from private equity investor Palisades Capital and senior secured lender CIT.

The master franchise quickly built some 56 stores in New York, South Carolina and Nevada since 2005.

Dunkin’ was happy.

Dunkin’ Donuts honored New York-based Kainos Partners as “developer of the year” in July, 2008, meant to have the way it grows emulated by others. In a toast given at a ceremony for its award winners, Jon Luther, who at the time was chairman and chief executive officer of Dunkin’ Brands, Inc., said: “This room is filled with an accomplished and elite group of leaders from all around the world who represent the very best of the Dunkin’ Brands system. I applaud the values and dedication you all bring to this company.”

But a year later, Kainos was filing Chapter 11 for bankruptcy protection.

When asked why the master franchise failed and whether the high number of store locations spread out in such a diverse geography had caused the company’s downfall, CEO Balis replied, “Unfortunately, I cannot comment on that.”

Dunkin’ has been caught up in the coffee wars, a war over the menu price among McDonald’s, Starbucks and others over cups of coffee. Meanwhile, competitors are increasing breakfast offerings to raise revenues in the tough economy. “It is a challenging market,” says Balis over his firm’s decline. “It didn’t help that some of our competitors are advertising very aggressively in the breakfast segment.”

Kevin McCarthy, current chairman of Dunkin Donuts Indepedent Franchise Owners association and a former vice president of real estate and operations at Dunkin’ Donuts, thinks that it is a problem of franchisor Dunkin’ not understanding the chain’s traditional strengths. Speaking strictly on behalf of himself, McCarthy thinks misconceptions caused Dunkin’ to use the wrong development strategy.

He stresses that Dunkin’ is largely a mom & pop franchise chain. It should grow organically, rather than using large area developers. “Nothing replaces a franchise operator who is on premise,” declares McCarthy. He stresses a slower but more steady growth is by opening a store to get it profitable, and then open another in a fairly contiguous neighborhood that the owners know well.

Read More at: BlueMauMau

Rubenstein: No $10 Billion L.B.O.’s Anytime Soon

While David M. Rubenstein thinks happy days for private equity are coming again, he says one shouldn’t bet on seeing the mega-buyouts of yesteryear return anytime soon.

Mr. Rubenstein, the Carlyle Group founder, told Bloomberg Television in an interview on Thursday that many of the elements are in place for a recovery in the leveraged buyout industry. But the big deals from the golden age remain highly unlikely: “If you want to do a $10 or a $20 billion buyout, I think that’s unrealistic in this day and age right now.”

Watch a video of the interview:

Mr. Rubenstein said that private equity firms are benefiting from the re-opening of the debt gates, giving him and his competitors access to the financing they need to do deals again. Companies are more willing to consider deals at more seller-palatable prices, too.

Still, some aspects of private equity deal-making remain harder. Debt remains more expensive than before and carries more covenants, or restrictions. And private equity firms are forced to increase the amount of equity they will put into an L.B.O.

NY Times

DDIFO Editors Note: The Carlyle Group, is one of three private equity groups that own Dunkin’ Brands.

Bain Gets Poor Moody’s Review

Jerry Kronenberg writes in the Boston Herald that former U.S. Senate hopeful Steve Pagliuca is touting one-time rival Martha Coakley’s job-creation credentials, but a new study questions his own firm’s ability to turn companies around.

Moody’s recently ranked Boston-based Bain Capital – where Pagliuca serves as a managing director – the fifth-worst major private-equity firm in terms of buying businesses and saddling them with risky debts.

“Companies sponsored by (Bain) performed poorly during our study,” Moody’s wrote in its report. Pagliuca – who lost to Coakley in last week’s Democratic primary for the late Sen. Edward M. Kennedy’s seat – has since endorsed his ex-rival.

“Martha (has) a very strong jobs plan that will get people to work,” the Bain executive said yesterday during a campaign stop with Coakley at Lawrence clothing maker Polartec.

Moody’s found that 45 percent of 22 companies Bain bought in recent years have either defaulted on debts or run a high risk of doing so. For instance, radio giant Clear Channel Communications, which Bain and Boston’s Thomas H. Lee Partners bought for $26.7 billion last year, is a “likely candidate for restructuring or bankruptcy,” researchers wrote.

THL Partners, the only other Hub firm included in the Moody’s study, ranked third from the bottom.

Moody’s listed 55 percent of THL’s recent acquisitions in default or distress – a finding the firm disputes. THL claims the report has several errors, including a failure to count at least seven healthy companies in the mix.

Private-equity firms borrow big bucks to buy businesses, putting the resulting debts on the books of companies they buy. That means that, while private-equity firms own the businesses, the companies they’ve bought must actually pay creditors back.

Critics say this means workers and lenders – not private-equity investors – suffer if businesses fail because of excess debt.

“As companies become more distressed, one way they cut costs is through layoffs,” said Josh Kosman, author of “The Buyout of America: How Private Equity Will Cause the Next Credit Crisis.”

Kosman and others argue private-equity firms took advantage of a 2005-07 drop in interest rates to make deals that stuck businesses they bought with lots of debt. These companies could fail when the loans come due in a few years, critics charge.

Kosman said at least six businesses Bain bought in the past have gone bankrupt – including Dade International, a deal Pagliuca personally oversaw.

Private-equity firms dispute Moody’s report. Among other things, the industry claims the study wrongly labeled some businesses in default merely for taking advantage of this year’s market meltdown to buy back their debt at bargain prices.

“Half of (the) defaults captured by Moody’s are not (true) defaults,” the Private Equity Council wrote in a critique of the study.

A Bain spokesman said Moody’s “misrepresented the solid overall health and market leadership of (our) companies.”

DDIFO’s  editors note: Bain along with Lee Partners and the Carlyse Group own Dunkin Brands