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3G Capital Opts for Top-Up in Burger King Buyout

Brazilian-backed 3G Capital used a top-up to hasten its $4 billion buyout of Burger King. The deal, which closed in October, was the first of a flurry of leveraged buyouts that has turned around a moribund market.

In a reversal of the traditional global acquisition scenario, a Brazilian-backed buyout firm recently bought an American icon in Burger King, the fast-food rival to McDonald’s. It’s another sign that the leveraged buyout is back after 18 months on ice.

For $4 billion, 3G Capital purchased Miami-based Burger King Holdings, 35 percent of whose business is overseas. Behind New York–based 3G is Brazilian billionaire Jorge Paulo Lemann, who helped engineer InBev’s 2008 acquisition of Anheuser Busch Cos. Another Brazilian at 3G, managing partner Alex Behring, will become Burger King’s co-chairman. The new CEO is Bernardo Hees, former head of railway giant América Latina Logística.

The Burger King deal, which closed in October, was the first of a flurry of LBOs that has turned around a moribund market. According to Dealogic, there were $199.37 billion worth of buyouts worldwide in 2010, up from $105.4 billion in 2009. After lying low for almost two years, the 1,600 U.S. private equity firms have some $1 trillion in unused “overhang” to invest, according to professional services firm PricewaterhouseCoopers. “You have a lot of dry powder out there, and the financing in the form of high-yield debt is available to do the acquisition,” says Timothy Hartnett, U.S. private equity leader at PwC.

John Robertshaw, co-head of the private fund group at Credit Suisse in New York, says bankers are also more flexible about how much they will lend in LBOs. In the recession the average fell to between 1.5 and 2.5 times debt to cash flow, but now it’s 4.5 to 5 times. “For the right deals, the financing markets are wide open,” Robertshaw says.

As well, corporations are more comfortable selling underperforming divisions now that the market has rebounded, says Jeffrey Bunder, Americas private equity leader for advisory firm Ernst & Young. When talks on the Burger King sale began last summer, the company was struggling. Sales had dropped 2.3 percent over 2009, and its share price had tumbled from $23.88 to $17.28.

No stranger to private equity firms, Burger King had previously been sold off in a 2006 IPO by Bain Capital, Goldman Sachs Funds and TPG Capital. That transaction proved to be a whopper for the trio: The IPO valued Burger King at $2.26 billion, up from the $1.5 billion they paid for it in 2002.

Sources close to the deal say 3G’s Brazilian backers thought they could better promote Burger King in the increasingly vital emerging markets. 3G is providing $1.5 billion in equity financing, and there is a $1.9 billion senior secured credit facility from JPMorgan Chase & Co. and Barclays Bank, along with $900 million in unsecured notes. The purchase price was about 9 times earnings before interest, taxes, depreciation and amortization. With so much debt, it could be tough to outdo Burger King’s previous private equity owners.

Both parties wanted to close the deal quickly: “Businesses don’t usually thrive when they are in that transition phase,” says Eileen Nugent, a partner at New York–based law firm Skadden, Arps, Slate, Meagher & Flom, which represented Burger King. To speed things up, they opted for a tender offer instead of a conventional merger. 3G needed 90 percent of Burger King stock to achieve a short-form merger and avoid a time-consuming shareholder vote.

But it had no guarantee of doing that, and its financiers were reluctant to lend if there was a lag between acquiring a majority of shares and completing the merger. So buyer and seller agreed to an unusual arrangement called a top-up, in which Burger King issued new shares to boost 3G from a simple majority to 90 percent.

Top-ups in private equity deals were frowned on by some plaintiff’s lawyers, but last November the Delaware Court of Chancery ruled in favor of the practice. R. Alec Dawson, a New York–based partner at law firm Morgan, Lewis & Bockius, says top-ups make it simpler to meet margin rules set by lenders: “Private equity sponsors can have a much easier time using a tender offer route as opposed to a typical merger.”

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