The King Meets his Public
Burger King, the perennial No. 2, is finally ready for its IPO, thanks to a private-equity overhaul.

(FORTUNE Magazine) - Any day now, barring unforeseen calamity, Burger King will join the ranks of publicly traded corporations. It marks a first for the home of the Whopper, which since its founding in 1954 has been a private firm, a subsidiary of a big American food company, a subsidiary of a British conglomerate, a subsidiary of an even bigger British conglomerate, and most recently, the property of three private-equity firms.

Life as an independent company with a stock market listing won't be easy. Burger King is a distant No. 2 to McDonald's (Research), with Wendy's (Research) no longer just nipping at its heels but threatening to surpass it in the slow-growth U.S. hamburger market.

Still, at least the company now has a fighting chance. Over the past two years CEO Greg Brenneman, veteran of turnarounds at Continental Airlines and PwC Consulting, has returned swing to the King. New products keep coming, same-store sales are up seven quarters in a row, and the current ad campaign with the King, while a bit unsettling, at least isn't lame. The chain is still closing underperforming restaurants in the U.S. but added 210 outlets abroad last year.

After losing money from 2001 through 2003, Burger King had net income of $47 million in the fiscal year that ended last June and $49 million in the final six months of 2005. (McDonald's made $2.6 billion last year; Wendy's, $224 million.) "It's definitely a chain that has turned around its business, and the management team seems to know where it's going," says Ron Paul, president of restaurant consulting firm Technomic.

This turnaround has occurred under the active supervision of BK's owners: Texas Pacific Group, Bain Capital, and Goldman Sachs Capital Partners. Nowadays we call these private-equity firms. Two decades ago they were "LBO artists" or just plain "sharks." There are many more of them today, with vastly more money to spend (private-equity firms raised $83.5 billion in 2005, according to Thomson Venture Economics, up from $2.4 billion in 1985). Yet they have ceased to be seen as a blight. Leveraged buyouts are now an accepted part of doing business in America.

This is an enormously positive development. It's not that the private-equity people are all brilliant. They're certainly not altruistic--Burger King borrowed $400 million to hand over to its owners and management before going public (one of many reasons for potential investors to be wary). And the current boom in fundraising will bring lots of dumb deals. But private equity offers a useful form of corporate organization between public company and traditional private firm.

When they buy a company, private-equity firms invest some of their own money and borrow more. (The three owners of BK put up $442 million to buy it from British drinks giant Diageo (Research) in 2002, borrowing the rest of the $1.4 billion purchase price.) The firms are thus under intense pressure to deliver results--both from lenders and from their investors. But they have a few years to do so away from the glare of public markets.

Along with their cousins in venture capital, private-equity firms provide a choice that previously didn't exist. And as the people who offer 221,184 variants of the Whopper will tell you, choice is good. One wonders what might have become of BK if such alternatives had been available in the mid-1960s, when the fast-food business began to explode.

The company's founders wanted to take it public, but Wall Street wasn't receptive. The only alternative was to sell out to a bigger company. Pillsbury bought Burger King in 1967 and invested enough to leave Burger Chef and Jack in the Box in the dust. But in his autobiography, BK co-founder Jim McLamore (who died in 1996) lamented that McDonald's, which went public in 1965, invested far more.

Now Burger King is going public. It is too late to catch McDonald's, and it may even be too late to make a growth business out of burger flipping. But it's nice that they'll finally get to have it their way.

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