The deal involving the third-largest burger chain grabbed headlines because it will prompt an initial public offering of Burger King shares on the New York Stock Exchange, coming full circle from the formerly public company's $4 billion leveraged buyout by 3G Capital in 2010. But Burger King isn't the only one up to its old tricks. Pershing Square's stake in Justice Holdings represented a rare buyout investment push, but the fund's minority investment in Burger King also signals that you can't teach an old dog new tricks when it comes to identifying value investments.
Ackman's appetite hasn't changed with Burger King deal.
Ackman's stake may turn out to be a canny investment, holding firm to the hedge fund manager's investing discipline and his focus on significant, but not controlling, stakes in consumer-oriented companies. At the Value Investing Congress in October, Ackman indicated that Justice Holdings would look to buy a company and then sell shares in an IPO. "Every private equity firm should be banging down our door," Ackman said when speaking about possible deals the fund could make. Ackman's Pershing has large stakes in companies including J.C. Penney ( JCP), Fortune Brands ( FBHS), Family Dollar ( FDO) and Kraft Foods ( KFT). In a subsequent conference call about the investment on Wednesday, Ackman said that after having been familiar with 3G's top executives for years, he and Justice Holdings began to court Burger King in earnest. Because Justice Holdings is what's called a special-purpose acquisition company, or SPAC, Ackman focused on how the fund could assist a Burger King IPO, which 3G had targeted for the first quarter of 2012. In the call and Tuesday's press release, Ackman highlighted the improving earnings of Burger King, citing metrics that have been a key to many of his previous value investing coups. "Since 3G's acquisition of Burger King in October 2010, EBITDA minus CapEx has increased from $320 million in 2010, to $503 million in 2011, with 2012 EBITDA minus CapEx expected to be nearly double that of 2010's results," said Ackman. Burger King is also undergoing a re-branding and turnaround effort, similar to other Pershing Square Investments in BEAM ( BEAM) and J.C. Penney. Earlier this week, Burger King launched an overhaul to its burger-dominated menu, adding items like mango-flavored real fruit smoothies and honey-mustard crispy chicken snack wraps. The moves may help the company stay competitive against fast-food competitors McDonalds ( MCD), Wendys ( WEN), Arcos Dorado's ( ARCO) and Yum! Brands ( YUM). Ackman took a dig at McDonald's relative to his bet on Burger King and the lean shape its burger empire has taken under private ownership. Answering an analyst question on the conference call about the cost-cutting during Burger King's short-lived private years, Ackman said, "Is McDonald's an enormously bloated company? Yes...That's the legacy of corporate America."