Burger King and Reverse Mergers
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Burger King (NYSE: BKW) is back on the big board in what had to be one of the quietest IPOs ever. The difference here is that their arrival onto the NYSE wasn't brought about by an IPO at all, but a "reverse IPO." There is no roadshow, no investor presentations, no excitement or hoopla.
The reverse IPO works like this:
1) Find a company that's already publicly traded.
2) Merge with said company.
3) Done. Now you're public.
Burger King made it a little more complicated than this. Prior to the listing, Burger King's owner was 3G Capital. 3G is a hedge fund backed mainly by three Brazilian billionaires who made their money in various other private equity deals. When 3G bought BK, they sought to re-work the brand away from the prying SEC and court of public opinion. During this transformation, BK McDonaldsified. They stripped away the edgy Crispin Porter ads (creepy king, even creepier subservient chicken) and replaced them with McGarryBowen conceived family-friendly stuff like David Beckham drinking a smoothie, or Steven Tyler working behind the counter and messing things up (insert laugh track). They expanded the menu to include "healthy" options like smoothies, salads and sweet potato fries, and they also committed to remodeling stores to where 40% are what they call "20/20," that is the modern, futuristic image I'm sure you have noticed but not totally thought about. Currently, only 11% of stores are designed this way. Essentially they widened the demographic from males, aged 18-34, to, well, everyone.
So, anyway, 3G made all these changes. They then sold 29% of their spruced up shares to Justice Holdings for $1.4 billion. Justice is a London-based investment vehicle co-founded by Bill Ackman (who also founded Pershing Square Capital; a fund that owns, among other things, 7.8% of Target, 38% of Borders Group, 16.5% of JCPenney, and 12.2% of Canadian Pacific Railroad). The 29% of Burger King was absorbed into a subsidiary of Justice, already listed on the London Stock Exchange (step 2 above). They then suspended trading in London, created a Delaware holding company, and re-listed 16% of shares on the NYSE. I was a little confused about how exactly you can just take one stock off an exchange and throw it on another, too, so page 5 of this presentation might help.
Based on some of the other reverse IPOs in history, the trend seems to be the deal is a desperate rescue, rather than clever financing.
-To protect them from Chapter 11, America West bought US Airways in 2005, creating a new public company, US Airways Group (NYSE: LCC).
-After a DoD report outlining how their accident rate was 14 times higher than average, a critical FAA report that suggested grounding completely, and a crash that killed 110 people, ValuJet was in serious need of a brand makeover. In 1997, a merger with with the parent of AirTran was announced, effectively wiping the slate clean. The company formed in the merger was later bought by Southwest Airlines (NYSE: LUV).
There are many reasons why Burger King might have taken the reverse IPO route: poor economy, Facebook IPO fallout (but the deal was agreed upon before any of that came about), cost of full roadshow, and so on. But I am a little skeptical as to why, if investors are fully behind the re-making of the brand, they were not comfortable enough to generate the buzz of a full scale IPO. Can anyone think of a better way to really get people's attention?
TheLaowai has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Burger King Worldwide and Southwest Airlines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.
