China FMCG

Burger King in China and Turkey attracts private equity buyers

The world’s largest franchisee of the fast-food chain outside the US is on the block. One wealthy Turkish family holds the key to a successful sale.

Burger King is back up for sale in China and Turkey after growing swiftly in both emerging markets on the back of urbanisation, rising disposable incomes and expanding distribution channels, according to people familiar with the matter. 

And this time, several ca shed-up private equity firms have expressed their interest in buying the largest Burger King franchise globally, the people said.

The home of the Whopper entered China in 2005 and has been rapidly growing its network of quick-service restaurants ever since. The franchise opened its 1,000th store on December 30, having had just 85 outlets in 2012.

The Turkish Burger King franchise is a decade older with 1,663 outlets as of March 31 and a supply chain streching all the way to cattle ranches.

Burger King is still far smaller in China than say either KFC or McDonald’s, which boast over 5,900 and approximately 3,000 locations, respectively.

That suggests it has plenty of room to grow further in the world’s second-biggest economy. To that end, Burger King China's chief executive, Ekrem Ozer, outlined plans in December to add another 1,000 stores by the end of 2021.

But Burger King also faces stiff competition in these markets and has bled money as it has grown; its net loss in China and Turkey widened to TL253.9 million ($45.27 million) in 2016 from TL153.0 million in 2015, the privately owned company said in a rare US filing. 

BACK ON THE BLOCK

It's not the first time that a piece of Burger King China has been up for grabs but this time it's different.

New York private equity firm Cartesian Capital Group had been looking to sell a stake in Burger King China for several years and hired Bank of America Merrill Lynch to help with the process.

However, the company led by Peter Yu struggled to generate significant buying interest as it didn't have full control of the franchise. Via its second fund Pangaea Two LP, Cartesian owned a 31% share of one of the units that formed Burger King China’s complicated ownership structure as of February last year. 

That roadblock vanished recently after the owner of the holding company for China and Turkey, the Kurdoğlu family, signalled its interest in joining the sale. TAB Food Investments (TFI) is led by chairman Ertuğrul Kurdoğlu and chief executive Korhan Kurdoğlu.

So the momentum behind the process has now picked up pace. There are tasty precedents too.

Private equity firms are hungry for companies that cater to China’s burgeoning middle class. Western brands with a long history have widespread recognition among these consumers and are relatively easy to expand as a result. Citic Capital invested in McDonald’s in 2017 while Primavera bought into Yum! in 2016. Bain Capital bought Burger King in the US back in 2002.

Chinese private equity firms may have an edge in the auction of Burger King as they could convice the seller that they have greater on-the-ground know-how to fight competitors.

Restaurant chains have grown rapidly as rural populations have migrated into cities and digitisation has allowed from wealthier consumers seeking convenience to easily order food delivered to their homes or offices. The Burger King franchise, itself, registered system-wide same-store sales growth of 13.4% in China and 6.9% in Turkey in 2016.      

Such is the level of their recognition that funds can convince banks to put up leverage to finance deals to buy these international brands.

In that respect, Burger King presents another well-known draw for private equity funds.

Also, knowing they can get a controlling stake in the business means they can have it their own way because they have the power to drive growth as well as sell out when they spot a chance to lock in profits.

With $3 billion in capital commitments under management, Cartesian builds and runs the Burger King restaurants in China with the option to sub-franchise them.

Cartesian is keen to exit as it has been an owner for over seven years, quite a stretch in private equity terms. The relationship started when Miami-based Burger King formed a joint venture with Cartesian and the Kurdoğlu family in 2012.

Neither Burger King in China and Turkey nor emerging markets-focused Cartesian responded to requests for comment. A Bank of America Merrill Lynch spokesperson declined to comment.

FAILED IPO

Turkey’s Kurdoğlu family and Cartesian have each tried to exit Burger King before, giving us some idea of the price they expect to get for the business.

The holding company of Burger King in China and Turkey, TFI, filed for an initial public offering worth some $220 million on Nasdaq on November 13, 2017. The selling shareholders in the IPO also included Goldman Sachs and Credit Suisse who bought 10% of its stock for $150 million in 2016, valuing the company at $1.5 billion at the time.

Istanbul-headquartered TFI pulled the IPO on November 8 the following year after failing to gather enough interest from public equity investors at the price it had hoped, according to a person familiar with the process.

This time around the sellers are hoping for a whopper of a deal.

¬ Haymarket Media Limited. All rights reserved.

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