CHICAGO--()--Fitch Ratings has taken the following rating actions on Burger King Corporation's (Burger King; NYSE:BKC) Issuer Default Rating (IDR) and outstanding debt ratings following its definitive agreement to be acquired by affiliates of 3G Capital.
--Long-term IDR downgraded to 'B+' from 'BB';
--Secured bank facility affirmed at 'BB+'.
Fitch has also placed the IDR on Rating Watch Negative and assigned a 'RR1' Recovery Rating (RR) to the secured bank debt.
The downgrade reflects the likelihood that leverage will increase considerably to finance the deal and Fitch's opinion that the probability for completion is very high. Burger King's board has unanimously approved the offer, the premium is significant and 3G Capital has received commitment letters from lenders for financing. Private equity affiliates of TPG Capital LP, Goldman Sachs Capital Partners and Bain Capital Investors have also entered into agreements with 3G Capital to tender their shares in favor of the offer. The aforementioned private equity affiliates currently own approximately 31% of Burger King's outstanding common shares and hold multiple seats on the board.
The transaction value of $4 billion, including the assumption of $753.7 million of secured bank debt at June 30, 2010, represents a 46% premium over Burger King's stock price prior to yesterday's news regarding a potential buyout. The purchase price multiple to Burger King's $444.6 million of earnings before interest, taxes, depreciation and amortization (EBITDA) for the fiscal year ended June 30, 2010 is 9.0 times (x). Fitch views the purchase price as relatively high, given recent acquisition multiples in the industry and the 46% equity premium.
Under the terms of the agreement, which was unanimously approved by Burger King's Board of Directors, stockholders will receive $24 cash per share for all outstanding shares of the company's common stock. 3G Capital plans to commence a tender offer for these shares no later than Sept. 17, 2010. The transaction is expected to close in fourth-quarter 2010 unless Burger King solicits and receives superior proposals from other potential buyers by Oct. 12, 2010. Fitch currently does not believe this will occur.
Although uncertainty regarding the magnitude and type of incremental debt remains, Fitch believes that the vast majority of the $4 billion deal value will be debt-financed. Should an excess of $2 billion of incremental debt be used to finance the transaction, Burger King's pro forma rent-adjusted leverage - defined as total debt plus eight times gross rent expense divided by earnings before interest, taxes, depreciation, amortization and gross rent expense (EBITDAR) - could exceed 6.0x. Pending more details around acquisition financing, Fitch may take additional downgrades within the 'B' category (as the Rating Watch Negative indicates). The current 'B+' rating reflects the minimum downgrade based on estimated financing scenarios and Fitch's opinion that the likelihood of a leveraging event has increased even if the transaction with 3G Capital does not materialize.
The affirmation of Burger King's 'BB+' secured debt rating is based on the analysis of its recovery prospects. The analysis incorporates Fitch's expectation that Burger King's existing lenders will receive 100% of their remaining principal, which totaled $753.7 million at June 30, 2010. Furthermore, per the terms of Burger King's credit agreement, an event of default and acceleration of payment would occur if an entity acquires more than 25% of Burger King's voting stock. Fitch plans to withdraw its rating on the existing secured bank facility once this debt is repaid.
For the fiscal year ended June 30, 2010, rent-adjusted leverage was 3.5x. Rent adjusted interest coverage, defined as EBITDAR divided by gross interest expense plus gross rent expense, was 2.9, and funds from operations (FFO) fixed-charge coverage was 2.9x. FFO fixed-charge coverage is defined as funds from operations plus gross interest expense plus preferred dividends plus rent expense divided by gross interest expense plus preferred dividends plus rent expense. Burger King generated $125.9 million of free cash flow - defined as cash flow from operations less capital expenditures and dividends during the fiscal year. Liquidity as of June 30, 2010 includes $187.6 million of cash and $115.8 million of revolver availability.
Burger King's ratings consider its good cash flow generation and competitive position in the quick-service restaurant (QSR) industry. According to Nation's Restaurant News' June 28, 2010 annual ranking of the top 100 restaurant companies, Burger King is the third largest QSR chain with approximately 10% share. However, Burger King's market share has fallen from roughly 11% over the past two years.
The ratings also reflect Fitch's opinion that the brand continues to be hampered by significant challenges in Burger King's system-wide infrastructure. Approximately 89% of Burger King's units are operated by franchisees for which relationships have been tenuous. The company has made progress with the nation-wide rollout of its flexible batch broiler kitchen equipment, a new Point-of-Sale (POS) system and gradual, albeit slow, remodeling and reimaging of its restaurant units. Burger King's same-store sales declined 2.3% during the latest fiscal year, underperforming many of its QSR peers. Fitch expects industry headwinds related to high unemployment and weak consumer confidence to continue to pressure top line growth.
Additional information is available at 'www.fitchratings.com'
--Additional sources used by Fitch include Nation's Restaurant News -one of the leading trade magazines devoted to the restaurant industry.
Applicable criteria and related research:
--Corporate Rating Methodology (Aug. 16, 2010);
--'High-Yield Food,
Beverage, and Restaurants: Cross-Company Liquidity, Debt and Covenant
Analysis' (July 26, 2010);
--'Burger King Corporation Credit
Analysis' (Dec. 21, 2009).
Related Research:
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646
High
Yield Food, Beverage, and Restaurants: Cross-Company Liquidity, Debt and
Covenant Analysis
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=540829
Credit
Analysis: Burger King Corporation
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=492468
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.
Facebook
Twitter
LinkedIn
Delicious
Reddit
StumbleUpon
Digg
MySpace
Newsvine
Google Bookmark
Yahoo! Bookmark
Email
Email 
