Burger King Goes Public: Why You Should Be Wary

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U.S. investors will soon get the chance to buy back into Burger King after the fast-food chain announced yesterday that it plans to once again list on the New York Stock Exchange.

The move comes less than two years after privately held 3G Capital Inc. took the company private. Under the terms of this latest deal, Justice Holdings Ltd. (LSE: JUSH), which is owned by activist investor Bill Ackman (who recently made headlines by trying to shake up the board at Canadian Pacific Railway), will pay $1.4 billion to 3G for 29% of Burger King. 3G will keep a 71% stake.

When the deal closes, Justice will be delisted from the London exchange, and Burger King shares will start trading on the NYSE under an as-yet-unannounced symbol.

The move comes just a day after the company announced a revamped menu that includes 10 new items, such as Caesar salads, wraps and fruit smoothies. The chain is launching its biggest-ever marketing blitz to promote the new items.

Analysts See Steep Climb Ahead for Burger King

The deal values Burger King at $4.8 billion, up sharply from the $3.3 billion that 3G paid for the company in 2010. That caught the attention of a number of analysts, including Telsey Advisory Group’s Peter Saleh.

Quoted in a Bloomberg.com article, Saleh said that the company’s move to go public again seems a little hasty. He also pointed out that Burger King hasn’t changed much in a year and a half, and a lot of the restaurants still need to be remodeled.

Over at MSN Money, Jonathan Berr had a simple question: “What sane person would buy Burger King shares?” He then rhymes off a laundry list of the burger giant’s recent struggles, including its recent dethroning by Wendy’s (NasdaqGS: WEN) as the country’s second-biggest fast-food chain. He also points out that sales have stagnated despite the company’s ongoing attempts to reinvent itself.

The new menu? Berr gives it a definitive thumbs-down: “The company apparently decided that if it can’t beat McDonald’s, it will turn itself into McDonald’s. On a positive note, Burger King has ditched the creepy ‘King’ commercials.”

Burger King Is an Also-Ran in China

Some of the leading fast-food restaurant chains are expanding aggressively overseas—particularly in rapidly growing markets like India and China—to offset sluggish growth in the U.S.

But here too, Burger King is trailing. The chain only entered China in 2005, far later than market leader Yum! Brands (whose banners include Pizza Hut and KFC), which opened its first outlet in the country back in 1987. In 2011, Yum’s China division opened a record 656 new restaurants in China (which, according to Bloomberg.com, amounts to a new restaurant every 14 hours).

Yum now has over 4,500 restaurants in the country, more than double the number run by McDonald’s, which has also been stepping up its Chinese expansion.

By contrast, at the end of 2010, Burger King had just 30 outlets in China.

Here’s a Lower-Risk Restaurant Investment than Burger King

In early March, Investing Daily editor Ben Shepherd took a close look at the highly volatile U.S. restaurant industry. In his article “Beat the Dinner Rush: Invest in Restaurants the Low-Risk Way,” he examined the many risk factors that fast-food chains, including Burger King, currently face.

His conclusion? Safety-conscious investors should instead look to companies that supply these chains, like Sysco Corp. (NYSE: SYY). The company now controls 17% of the U.S. market, more than double the market share of its closest competitor. That makes it easier for it to pass along rising food costs to its customers. In addition:

“Sysco’s commitment to wringing maximum efficiency out of its operations has been a major driver of its impressive earnings growth. In a feat reminiscent of United Parcel Service’s (NYSE: UPS) famous near-elimination of left turns, Sysco has undertaken a multi-year project to route its deliveries more efficiently and shorten supply chains by constructing additional distribution centers.”

To top it off, Sysco trades at a lower p/e ratio than both McDonald’s and Wendy’s, and it pays a healthy dividend: quarterly payments of $0.27 a share yield 3.66% on an annual basis.

Originally posted here.