Burger King Downgraded – Analyst Blog

Burger King Holdings Inc.’s (BKC), the world’s second-largest hamburger chain after McDonald’s Corp. (MCD) rating has been downgraded to Underperform from Neutral. The rating downgrade is based on the company’s acquisition by a private investment firm, 3G Capital, for $24 per share, or $4.0 billion, including the debt of the company.

 

The offer price represented a roughly 46% premium to the share price before the speculation of buyout talks in the market on August 31. Thus, we expect investors to book profit on shares, given that the company will go private and no longer trade in the market once the deal is completed.

 

The transaction is expected to close in the fourth quarter of 2010. However, the completion of the deal is subject to regulatory as well as shareholders’ approvals and other customary closing conditions. Moreover, there will be a 40-day period where Burger King can consider if it gets any lucrative offer from any third party, running through October 12, 2010. Though the possibility of a higher bid seems negligible, completion of the deal is likely.

 

Additionally, Burger King’s current chairman and chief executive officer, John Chidsey will be replaced by Bernardo Hees, following the closure of 3G Capital’s pending acquisition deal. John W. Chidsey will transition to the role of Co-Chairman with 3G Capital Managing Partner Alex Behring. Thus, with shares trading close to the proposed acquisition price and change in senior management position, we see little upside potential for the shares from current levels.

 

Burger King posted its fourth quarter and full year 2010 adjusted earnings per share of 36 cents and $1.36, respectively, which surpassed the Zacks Consensus Estimates of 34 cents for the fourth quarter and $1.35 for fiscal 2010. However, both fourth quarter and full year earnings dropped 16% and 8% from 43 cents and $1.48 delivered in the comparable year-ago quarter and prior year, respectively.

 

Burger King’s total revenue plunged 1% year over year in both fourth quarter and full year of 2010 due to the decline in comparable sales. The company also missed the Zacks Consensus Estimate.

 

Moreover, sagging same-store sales and declining traffic, which the company expects to continue in 2011 due to the continuation of sluggish economy and a weak consumer environment, are adversely affecting the company’s growth. Furthermore, the discount war among fast-food chains to lure consumers and higher food and beverage costs is negatively affecting the company’s top and bottom lines.