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Burger King Takeover a Good Idea

Burger King shares surge on heavy volume, thanks to rumors of a private-equity buyout.

(Burger King article updated with new information and stock price movement.)

MIAMI (

TheStreet

) -- Shares of

Burger King Holdings

(BKC)

surged on heavy volume Wednesday as rumors of a potential private-equity takeover circulated on Wall Street.

"There's been a scuttlebutt about a possibility like that for a while now," Janney Montgomery Scott analyst Mark Kalinowski told

TheStreet

, citing a slew of private equity interest in other restaurant chains this year as well.

"It may be best for the

Burger King concept to be out of the public eye for a while and allow the new management to concentrate on fixing its challenges," Kalinowski said.

The

Wall Street Journal

originally reported that one firm interested in acquiring Burger King was

3i Group

, a British private-equity firm, citing people familiar with the matter.

But 3i Group emphatically denied such speculations to the

New York Times

, saying it had no interest in the fast-food chain and that it, a middle-market firm, typically involves itself in much smaller deals than the $2 billion or $3 billion that would be necessary for a leveraged buyout of Burger King.

The

Times

went on to say that Brazilian-backed

3G Capital

was among the interested parties in buyout talks with Burger King, led by Alexandre Behring, a former railroad executive who sat on the board of Jacksonville, Fla.-based

CSX

(CSX) - Get CSX Corporation Report

. Behring spent a decade with Latin American private equity firm

GP Investments

.

At some point in 2008, 3G held a 6.7% stake in another struggling fast-food chain:

Wendy's Arby's Group

(WEN) - Get Wendy's Company Report

, the

Times

noted.

>>Bankruptcy Watch: 20 Riskiest Restaurant Stocks

Burger King has been facing serious issues lately.

Burger King recently posted better-than-expected fourth-quarter profits

of $49 million, or 36 cents per share, but the bottom-line figures were sharply lower than year-earlier results. Global comps fell 0.7%, with comps at U.S. and Canadian locations down 1.5%.

"Media reports ... seem plausible, but such a transaction remains highly uncertain," noted R.W. Baird analyst David E. Tarantino. The analyst boosted his price target on Burger King's shares, expecting the stock to gain 15.5% in the next year, up from his prior target for share price growth of 9.4%.

Tarantino said the likelihood of a Burger King buyout is speculative, citing Burger King's healthy cash flows and opportunities to grow productivity as it expands abroad.

Kalinowski said Burger King's problems aren't necessarily unfixable as a public company, but that a private company is often able to do things it wouldn't be able to do if traded on an exchange.

Kalinowski said Burger King will have to heal its relations with its franchisees, relationships that have been strained for some time. It also must find a way not to be a

McDonald's

(MCD) - Get McDonald's Corporation (MCD) Report

clone, he argued.

"Burger King needs to figure out how to position itself more meaningfully away from McDonald's and still grow their business," he said.

Kalinowski estimated that at a $19 stock price, trading at 6 times multiple, Burger King's 2011 EBITDA could be $486 million.

The analyst has a neutral rating on Burger King shares, and a buy rating on McDonald's.

UBS

(UBS) - Get UBS Group AG Report

analysts expect Burger King to fetch between $19 and $22 per share, and predict that a string of private-equity takeovers of fast-food chains is likely to follow, given the strong performance of industry darlings McDonald's and

Chipotle Mexican Grill

(CMG) - Get Chipotle Mexican Grill, Inc. Report

.

Mexican restaurant operator

Rubio's was taken private by Mill Road Capital earlier this year for $8.70 per share

. In July an affiliate of

Apollo Management

took

TheStreet Recommends

CKE Restaurants

private for $694 million. CKE owned Hardee's and Carl's Jr. fast-food chains.

"The right private owner might help one or more of these chains eventually become better, and likely smaller, competitors to

McDonald's," UBS wrote in a note to investors. The note tapped

Sonic

(SONC)

, Wendy's,

Jack in the Box

(JACK) - Get Jack in the Box Inc. Report

and Chili's operator

Brinker International

(EAT) - Get Brinker International, Inc. Report

as other potential restaurant stocks that may be targets for private-equity buyouts.

Burger King, a public company since 2006, has been in the hands of private equity before, the

Journal

noted. In 2002, a group led by

TPG Capital

,

Bain Capital

and

Goldman Sachs

(GS) - Get Goldman Sachs Group, Inc. (GS) Report

Capital Partners bought Burger King for about $1.5 billion from

Diageo

(DEO) - Get Diageo plc Sponsored ADR Report

. The firms still owned nearly 32% of Burger King, and have significant representation on the board.

Burger King shares soared 14.7% higher to close at $18.86 Wednesday, with shares changing hands at nearly 22 times their average daily trading volume. Shares gained another 0.8% in after-hours trading. The stock dipped briefly mid-morning after 3i denied its involvement in a possible takeover.

Last week

two analysts cut their ratings and reduced their price targets on Burger King shares

, citing concerns regarding the company's full-year costs and sales.

UBS

(UBS) - Get UBS Group AG Report

analyst David Palmer said Burger King's performance in fiscal 2011 "will depend largely on the net impact of the U.S. breakfast rollout." Year-over-year comparisons will be more difficult because 2010 sales were also boosted by the launch of the $1 double cheeseburger.

Burger King plans to launch an enhanced breakfast platform this fall in U.S. and Canadian locations that will include new menu products and

Seattle's Best Coffee

in an effort to better compete with

McDonald's

(MCD) - Get McDonald's Corporation (MCD) Report

and

Starbucks

(SBUX) - Get Starbucks Corporation Report

.

-- Written by Miriam Marcus Reimer in New York.

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Miriam Reimer

.

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