Reaching fair value for that whopper of an IPO

Aaron Pressman

Back in February, I was pretty skeptical of Burger King's planned IPO given the company's slipping performance (improvement slowed) and big payouts to LBO buyers resulting in extra debt on the company's balance sheet. Subsequently, the CEO took off for no apparent reason and the company updated its financial results. Today, the King filed its share price range and valuation, generally a sure sign that the pricing is near. How does it look? Let's just say I wouldn't recommend slathering too much ketchup and mustard on this deal.

According to the filing, Burger King plans to sell 25 million shares at between $15 and $17 each. With 132.6 milion shares outstanding after the offering, that's an equity market cap of $2.1 billion at the midpoint of the range. With pro forma cash of $66 million and debt of $1.1 billion, that's an enterprise value of about $3.1 billion. They get so little pro forma bang from the IPO on the cash line because they're paying back some $350 million of the loans taken out to pay the current owners. Ouch.

For the most recent 12 months ended March 31, revenue was $2 billion, net income was $39 million or 37 cents a a share (pro forma for the IPO) and EBITDA was $264 million. So -- to the comparables. At $16 a share, that's a p-e of about 43, enterprise value 1.6 times revenue and 11.7 times EBITDA.

McDonalds (MCD) has been running a much better operation. With the company's shares at $34.40, the market puts an enterprise value on MickeyD's of $49 billion. Taking your basic ratios from Yahoo Finance, and you get a p-e of 17, enterprise value 2.4 times revenue and enterprise value 9.1 times EBITDA. If Burger King was Mickey Jr, it would be worth only $6 a share on a p-e basis, or $29 a share on a revenue basis or $11 on an EBITDA basis.

The current owners are LBO guys so no doubt they're looking at that enterprise value to EBITDA ratio. While BK is all liquored up, oops, I mean levered up, the stock market probably will too. So McDonalds has a ratio of 9.1, Wendy's (WEN) of 11.6 and Burger King wants 11.7? How can that be? Look for aftermarket sinkage after IPO buyers look to flip this soggy burger.

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