Pershing Square's positions in 4Q 2013

Part 2
Pershing Square's positions in 4Q 2013 (Part 2 of 7)

Pershing Square hikes position in Burger King Worldwide

Bill Ackman’s Pershing Square increased position in Burger King Worldwide (BKW) from 7.29% in 3Q 2013 to 10.66% in 4Q.

BKWEnlarge GraphThe position was first initiated in 3Q 2012 in an acquisition deal for a 29% stake in Burger King. In April 2012, Ackman’s then London-listed investment vehicle Justice Holdings, Martin Franklin of Jarden (JAH), and Nicolas Berggruen acquired a large stake in the hamburger chain from private equity fund 3G Capital for $1.4 billion. Justice Holdings was later dissolved, and Pershing Square and Berggruen became investors in Burger King, which was listed again on the NYSE.

Activist investor Ackman highlighted his investment thesis in Pershing Square’s 2Q 2013 investor letter. He said, “Burger King today trades in-line with its nearly 100%-franchised QSR peer group on a forward P/E multiple basis (Dominos Pizza, Dunkin Donuts, and Tim Hortons). We believe this valuation understates Burger King’s intrinsic value principally for two reasons. First, we believe that Burger King deserves a higher valuation than its 100%-franchised peers because of its superior global footprint and global brand awareness, which, when coupled with the company’s global joint venture business model should allow for superior long-term growth and investment returns. Furthermore, we believe the company has a significant opportunity to improve earnings by refinancing approximately $1.4 billion of debt that currently bears interest at above-market rates (~10.5%). Refinancing this debt at what we deem to be a market rate (approx. 6%) would be 12% accretive to the 2014 consensus forecast of $0.91 per share as it would save the company $0.11 per share on an after-tax basis. It will become feasible for the company to cost-effectively call its debt beginning in the first half of next year.”

The letter further said, “Given that Burger King currently has less leverage than its peers (DNKN at 5.3x, Dominos at 4.8x, BK at 3.7x net debt to EBITDA), the company could choose to increase its leverage and return a large amount of capital to existing shareholders in the form of a dividend and/or share repurchase of as much as 30% of the market value of the company. We believe this refinancing and capital-return opportunity presents a significant, under-appreciated short-term catalyst for the stock. We continue to be impressed with the strength and execution of the BKW management team and the capital-light structure of its high growth business model.”

BKWHEnlarge GraphIn Burger King’s latest 4Q 2013 results, the company reported a 4.4% increase in adjusted EPS to $0.24 per share. Fourth quarter total reported revenues of $265.2 million declined 34.4% from the prior year primarily due to the net refranchising of 360 company-owned restaurants in 2013. The company’s release said, “We completed our global refranchising initiative, fundamentally transforming our business model and putting restaurant operations into the hands of our experienced franchisees.”

Burger King said sales were driven by introduction of new menu items such as the Big King sandwiches and Satisfries, lower-calorie French fries, helped increase sales. Plus, BBQ rib sandwiches helped drive incremental traffic in the value tier. The company opened 670 net new restaurants in 2013, representing a 38.1% year-over-year increase.

The company beat earnings estimates but missed on revenue. Global comparable store sales were up 1.7% in 4Q 2013 and 0.5% for full year 2013. The comparable sales growth was mainly from international markets as the U.S. and Canada saw a 0.2% increase in comparable sales during the quarter. The company announced the formation of new joint ventures in France (with Groupe Olivier Bertrand) and India (with Everstone Group) to expand into these markets.

Analysts are bullish about the Burger King, whose main competitors include McDonald’s (MCD), which reported disappointing sales recently, and Wendy’s (WEN).

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