Burger King or Guess who’s coming to dinner?

The sale of Burger King is expected to be finalised in the last three months of 2010. Burger King has until 12 October 2010 to solicit a richer offer from other buyers, which does not seem very likely given that the deal’s valuation – at almost nine times cash flow over the last year – is higher than previous restaurant deals.

Burger King has not fared well at the hands of private equity. When drinks company Diageo sold Burger King in 2002 to a consortium of private equity companies including TPG, Bain Capital and Goldman Sachs for nearly a billion pounds (USD 1.5 billion), the fast-food restaurant was hardly sizzling with success. It had fallen far behind its main rival, McDonald’s.

So when the TPG-led private equity consortium floated Burger King on the stock-market in 2006, it should have done what private equity purportedly does better than others: get an ailing company back into shape.

Well, has it? The Financial Times newspaper in a commentary says otherwise. Four years after the float, Burger King is still in poor shape and needs to be taken private for another round of surgery.

While McDonald’s has remodelled 11,000 U.S. stores (there are now 31,000 locations around the globe), rolled out the McCafé format, upgraded its menu and introduced healthier options like apples and salads to bring in more women and families, Burger King has basically remained the same. It mostly appeals to young males who are not too worried about their bulging waistline.

Small wonder that McDonald’s has sailed through the recession far better than Burger King, which has been hurt by high unemployment rates among its core audience of young men.

Burger King’s controlling consortium of private equity firms should have seen most of this coming. Obesity has been a hot topic in the U.S. for almost 10 years. Did they re-draft the menu? Did they kick out the jumbo-sized meals and beverages? In other words, has management made Burger King move along with the times? Nope.

Instead they forced their franchisees to sell burgers for as little as USD 1.

“Burger King’s return to private equity ownership in the hands of the Brazilian-backed 3G Capital is not a good reflection on the buyout industry’s claim to make its money by fixing companies rather than through financial engineering”, the Financial Times concluded.

Surely, if Burger King really had been transformed as a business by its former owners, there would be no need for this deal?

However, the consortium made a lot of money on the deal.

Let’s wait and see if Mr Lemann’s 3G Capital outfit does any better than its predecessors. A source familiar with the situation said that about USD 2.8 billion of the USD 4 billion purchase price is debt, with the remainder equity.

Already, Burger King is loaded with debt. It was reported that in less than two years, Burger King will have to refinance over USD 650 million of debt – when its own market share has decreased.

How Burger King will ever get out of this mess and find the money necessary for a proper transformation that solves its problems is beyond us.

Burger King recently stated it will stick to its long-term goal of expanding its operations outside the U.S. to 55 percent, compared to 35 percent today. Some analysts say the acquisition could offer some tailwind to the plan, but that it would still take Burger King 10 to 15 years before it reaches this mix.

The fast food chain operates 12,150 restaurants across the world.