The protracted sale of Burger King to a consortium led by Texas Pacific Group finally completed today after the three private equity firms leading the bid agreed to pay $1.5bn for the fast food business owned by UK drinks company Diageo.
The price tag is just under a third below the original $2.26bn figure agreed in July, which was subject to specified performance targets. On November 18, the consortium, which also comprised Goldman Sachs Capital Partners and Bain Capital, pulled out of the original deal citing Burger King’s weaker performance in the latter half of 2002.
The original deal also suffered from a lack of appetite in the capital markets. The consortium had planned to raise around $1.66bn of debt to fund the transaction, of which $500m was to come from the high-yield bond market and the remainder from banks. However this proved impossible, due in part to the downturn in Burger King’s performance.
For the six months ending 31 December 2002, Burger King has expected to make 20 per cent less operating profit than in the equivalent period a year ago, when operating profit totalled $114m. The decline is largely attributed to a price war with the company’s biggest rival, McDonalds.
To ensure the completion of the deal, Diageo has guaranteed $750m of senior loans and a $100m revolving credit facility for Burger King. The credit facilities are structured to encourage the Burger King group to refinance these loans before their contractual maturity. If refinancing does not occur in the first three years, Diageo will receive an annual guarantee fee of five per cent of the outstanding principal amounts of the loans.
The post closing capital structure of the Burger King group will include $750m of senior loans provided by external lenders and $425m of subordinated debt provided equally by Diageo and the TexPac consortium. Financing of the transaction was arranged by JP Morgan and Citigroup.
Diageo’s financial adviser in the disposal was Greenhill & Co, UBS Warburg and Merrill Lynch International. JP Morgan Securities and Citibank advised the buying group.