Burger King

Paul Walsh selling Burger King? Timing of sale? The post-merger integration of Diaego’s
global wine and spirit operations led to 50% higher cost savings in the first year than
anticipated. However, overall growth and profitability lagged, and sales remained sluggish
through 1999. The stock price declined due to the question of Diageo's strategic focus. The
company revamped its internal structure, merged two core business units, and sold Pillsbury
to General Mills. The sale of Pilsburry was consistent with Walsh's belief in portfolio
simplification, focusing on core brands within the same business; Burger King (BK)
remained the only non-core business. BK suffered from a transient customer base,
unprofitable margins, and risk. Walsh wanted to sell BK due to its financial difficulties, as the
operating earnings of the BK division dropped. In late March 2002, the sales process started,
and the relaunch of the BK brand was underway; same-store sales turned up in April 2002.
The price for BK was initially set at $2.26bn, but between the signing of the purchase
agreement and the formal closing of the deal, same-store sales fell. BK’s performance began
to falter, and the potential buyers wanted store-by-store performance data. BK lagged in
answering questions, causing buyers to question management’s credibility. Diageo already
spent several months on the due diligence process, causing significant information leakage.
The market environment was not good as the high-yield bond market was overvalued due to
tensions in the Middle East, a weak economy, and accounting scandals. The turnaround plan
needed more time, and BK faced a price war with McDonald's. As the sales continued to
decline, the deal became untenable, the business deteriorated, and credit availability shrank.
The poor profit performance led to the lender withdrawing their financing. The discussions
between TPG and BK had already been ongoing for over two years, even though BK was not
as profitable in November as in June. As a result, TPG reduced their offer to $1.5bn, and
Diaego shares decreased by 3.2%; a new auction was not an attractive option. Withdrawing
from the acquisition market seemed too expensive for the management to solve
operational/execution problems, improve operating plans, and revitalize the franchise system.
Therefore, the terms of the deal with the TPG consortium must be renegotiated.

What is Burger King potentially worth to a financial buyer with access to $1.65 billion
in high-yield financing? [In your valuation, use the information in Burger King
Supplemental Data, an unlevered cost of capital (RA) of 11.8%, and a tax rate of 35%,
and assume that Burger King pays down $25m in debt per year during the forecast
period]

In class, we will focus on Bids W, X, and Z. Walsh has indicated that he is not interested
in holding stock in another listed company. How do these offers depend on Burger
King’s future? If Walsh is optimistic about Burger King’s future, which is most
attractive? What if he’s pessimistic? What should Paul Walsh do?

Burger King had not trained associates to the same level of operational expertise as
McDonald's. They appeared more susceptible to operational lapses and inefficiencies, and
franchisees carried high debt levels.
After the offers, banks begin their own DD process to assess the company's creditworthiness.
Bank support was essential for the success of the transaction. The period between signing the
merger agreement and closing the deal they usually lasted ¾ months (to examine the target
financial and legal position).