Group1_Team14

Auction of Burger King A

Sanjeet Walia

C065

Apoorva Chandna

D009

Vishnu Batra

D008

30/July/2015

Auction of Burger King A

Q1 Why Does Paul Walsh want to sell Burger King? Do you

agree with the timing of the sale?
Why to sell Burger King?
1. Diageo has the avowed strategy of simplifying its lineups of business
units and focusing on drinks business.
2. Declining metrics of the company, including customer visits and same
store sales.
3. Burger Kings operation was more susceptible to operational lapses
and inefficiencies, because of varying operational expertise amongst
associates.
4. Overseas penetration was only a fraction of the Mc Donalds.
5. Increased competition from McDonalds and Wendys, Pizza hut, Taco
Bell and others.
6. Many franchisee already carried a large amount of debt; difficult to
implement turnaround strategy.
7. NFA was openly critical of Diageos handling of the BK.
Do you agree with the timing of the sale?
As soon as the bids were invited, Burger King faced the following trouble
which suggests why the timing of the sale wasn't better.
1. Difficult time for high-yield bond market and already tanked bank
financing market.
2. Declining same store numbers for Burger King
3. Too much negative information about the buyer.
4. Whopper brand has become diluted and Burger King was losing market
share.
While some investor had a positive sentiments about the bits due to the
following reasons1. Entry of the Turn-around CEO John Dasburg. His competency and
credibility would be attractive to the PE firms.

Auction of Burger King A

2. The new strategic plan of Dasburg - fair share and value menu.
3. New product innovations and possibility of revamped Burger King
chain.

Auction of Burger King A

Q2What is Burger King potentially worth to a financial

buyer, with access to $1.65B in high-yield debt financing?
Is Greenhill's forecast reasonable? Are they consistent with
comparable firm multiples? [In your valuation, use an
unlevered cost of capital (Ra) of 11.8%, a tax rate of 35%,
and a closing date of July 2002, and assume that Burger
King pays down $25M in debt per year during the forecast
period.]
The financial worth of Burger king to a buyer has been calculated by doing
the valuation of Burger king. The same has been computed using three
methods which are as follows:
1) FCFF Valuation
PV of Free Cash
Flows
PV of Terminal
Value
Present Value of
the firm

92.23

107.
07

98.8
7

86.3
8

72.04
1,112.
40

1,568.99
bn

This computation suggests that value to be 1.57 bn. It is a little

lower than the bid range which Diageo has received for Burger
King (in the range of USD 1.8 2.7 bn or 1.15 - 1.62).
This is on account of conservative estimates used for computing
its value.
Valuation has been done using the WACC computed by levering
the unlevered cost of capital.
2) FCFE Valuation

Auction of Burger King A

Present Value of the firm's equity

Value of Debt
Present Value of the Firm

520.49
1,056.00
1,576.49bn

This computation also suggest a similar valuation of 1.58 bn. We

have used debt financing of 1.056 bn (which is equivalent to
USD 1.65 bn).
FCFE has been computed as:
FCFE = FCFF Interest (1-tax) debt repayment
Interest has been computed based on declining balance of debt
for the 5 years at the average of monthly Lehman US Universal
High Yield Corp. rates for the past one year. This is equal to
12.38%.
Valuation has been done using unlevered cost of capital which is
effectively the cost of equity for the company.
3) Market comparable
We have used the EV/EBITDA multiple for computing EV of Burger
king.
Comparable firms like McDonalds, Yum Brands, Dominos Pizza
and Wendy have been used.
The average EV/EBITDA multiple is 10.02.
This has been multiplied with the EBITDA figure of Burger King for
2002 which is 334 mn.
This gives us a market valuation of 3.347 bn.
This clearly indicates that the valuation from market
comparable is not consistent with the intrinsic value of
company calculated from FCFF and FCFE valuation. The
market value is more than double than what is calculated from
the latter methods.

FCFF
FCFE

Valuation
1,568.99
1,576.49

Auction of Burger King A

MARKET COMPARABLE
Average

3347.36
2,164.28 bn

Valuation from Greenhills assumptions has also been done. The

estimates used are quite aggressive given the present tough situation
that Burger King is facing.
Value of firm (FCFF) - 2.8 bn
Value of firm (FCFE) - 3.02 bn
Thus we believe valuing more conservative estimates based on past
growth trends of the company is more reasonable.