In Burger King Deal, Ackman Gnaws on Old Bone

NEW YORK ( TheStreet) -- Justice Holdings, an investment vehicle backed by William Ackman's hedge fund Pershing Square Capital Management, opted to use its funds for a 29% cash stake in Burger King.

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."

Burger King has been a laggard in the fast food lane. In March, Wendy's surpassed Burger King as the second largest burger chain in the U.S., according to Technomic. Overall, Wendy's had sales of $8.5 billion in 2011, compared with $8.4 billion for Burger King, and McDonald's continued to be the true king of burgers with $34.2 billion in sales, according to the data.

Sales trends also signal that McDonald's emphasis on diversifying its menu has paid off in recent years. Sales are up 26% in the past five years at McDonald's, up 9% at Wendy's and flat at Burger King, according to Technomic.

Justice Holdings investment in Burger King leverages a long relationship between Ackman and 3G Capital. Pershing Square will hold a 10% Burger King stake after its IPO, with the possibility that the firm and Ackman may buy additional shares on the open market, according to a statement.

In February 2011, Justice Holdings raised $1.45 billion for a publicly traded investment fund that would target a large acquisition, which was expected to give shareholders a significant return on investment. When the fund created by billionaire Nicolas Berggruen's Berggruen Holdings launched, it received a large investment from Ackman's Pershing Square, which amounted to roughly 33% of total shares.

With Pershing Square and other investor money amounting to $1.4 billion, Justice Holdings expected that the use of leverage could help it make a big takeover investment. "Justice's objective is to consummate a transaction of $5 billion to $10 billion in Total Enterprise Value," the fund says on its Web site.

Speaking on background, a spokesperson for Justice Holdings says that when adding Burger King's debt to its current $4.8 billion valuation, the vehicle's 29% stake meets its objectives of an investment in the $5 billion to $10 billion range.

While Burger King's upcoming IPO will test whether Justice Holdings and Ackman got their money's worth, the bigger question is whether a more traditional buyout investment may have given them more bang for their buck. Consider that Justice Holdings is putting up more cash to take a minority stake in Burger King than 3G Capital put up when buying the company in a 2010 leveraged buyout.

Burger King's majority owner 3G Capital will retain a 71% stake in the company after its listing, in what may amount to a big 2010 leveraged buyout coup. In 2010, 3G Capital bought Burger King for a value of $4 billion, but it only put up $1.2 billion in cash and financed most of the deal using debt. With Justice Holding's investment, Burger King is valued at roughly $4.8 billion and 3G's investment is now worth about $3.4 billion.

In its acquisition, 3G Capital took Burger King private for $24 a share, a 46% premium to market prices at the time. If 3G Capital were to successfully list Burger King it would be the second share listing for the king of burgers. In 2002, a consortium of private equity funds including TPG, Bain Capital and the private equity arm of Goldman Sachs ( GS) bought the company for $2.26 billion and IPO'ed shares at $17.50 in 2006.

Calls seeking comment from Pershing Square Capital Management, 3G Capital and Berggruen Holdings weren't immediately returned.

See why Molson Coors may have drunk dialed emerging market growth in its $3.5 billion StarBev acquisition for more on food and beverage M&A.

For more on deal trends, see 5 deal ready stocks loved by hedge funds portfolio's. See five stocks that could be trampled by a share overhang, for more on private equity backed IPO's.

-- Written by Antoine Gara in New York