Burger King's Shares Rise After Owners Sell Stock (Update2)

May 18 (Bloomberg) -- Shares of Burger King Holdings Inc., the second-largest U.S. hamburger chain, rose after a $425 million initial public offering allowed its private-equity owners to cash in on surging demand for stock in fast-food companies.

The shares climbed 64 cents, or 3.8 percent, to $17.64 at 11:14 a.m. in New York Stock Exchange composite trading. The Miami-based company said in an e-mailed statement yesterday it sold 25 million shares at $17 each. The stock, representing 19 percent of the company, is listed under the symbol BKC.

Burger King's IPO comes after it gained market share from No. 1 McDonald's Corp. and posted eight straight quarters of U.S. sales increases. Buyout firms Texas Pacific Group, Bain Capital LLC and Goldman Sachs Capital Partners, which paid $1.5 billion for the company in 2002, own a stake valued at about $1.81 billion and in February received a dividend of $367 million.

``It looks like what they've done is the easy part of the turnaround,'' said Francis Gaskins, president of Los Angeles- based IPO Desktop.

Burger King has a market value of about $2.35 billion, and the three private-equity firms own 77 percent. The company said it expects proceeds of $393 million. Oak Brook, Illinois-based McDonald's market capitalization is $43.4 billion.

Competitors Restructure

Burger King is becoming a public company as rivals McDonald's and Wendy's International Inc. revamp their menus and restructure their operations. Both companies have been pressured by activist investors including Bill Ackman, managing partner of Pershing Square Capital Management LP, to make changes because stockholders said the shares were undervalued.

``Europe will be a big piece of our growth,'' Burger King Chief Executive Officer John Chidsey said in an interview. ``We have huge opportunities in Asia. The possibilities are almost limitless.''

The IPO follows the departure in April of Chief Executive Greg Brenneman, the second CEO in four years. He led the company to its sales gains and a profit of $47 million in the year ended June 30.

Bankers managing the offering may sell 3.75 million more shares to meet demand, which will reduce the private-equity firms' stake to 74 percent. The three firms purchased Burger King from Diageo Plc in December 2002.

Options for Executives

In addition to the dividend, Burger King in February paid about $33 million to senior management in options and restricted- stock units, according to a regulatory filing. Proceeds from the IPO will be used to repay a loan taken to make the payments to the company's owners and its management.

``It was going to be a pretty modest debut,'' said Sam Snyder, an IPO research analyst at Renaissance Capital Corp. in Greenwich, Connecticut. ``Closing the gap, that's what Burger King is trying to do.''

Burger King in April reported a net loss of $12 million for the three months ended March 31, compared with profit of $1 million a year earlier. Sales rose 5.8 percent to $495 million. For the nine months ended March 31, Burger King posted profit of $37 million on sales of $1.52 billion. Sales at stores open at least a year increased for eight consecutive quarters through March 30.

McDonald's shares rose 22 cents to $34.78 in New York Stock Exchange composite trading. Dublin, Ohio-based Wendy's gained 40 cents to $60.48.

Forecasts Sales Growth

Burger King forecasts annual revenue growth of 6 percent to 7 percent for the next five years and earnings per share growth of more than 20 percent a year, Chidsey said during the company's sales presentation on the offering.

The chain is targeting average annual restaurant sales of $1.3 million, up from $1.12 million today, Russ Klein, chief global marketing officer, said during the presentation. McDonald's average restaurant sales are $1.8 million to $1.9 million, Burger King executives said.

One of the challenges Burger King faces is the financial health of its franchisees, who account for about 90 percent of the company's stores, according to a regulatory filing. Many of the franchisees in the U.S., Canada and the U.K. have experienced ``severe'' financial distress in the last several years, the filing said. Burger King's largest franchisee, with more than 300 restaurants, declared bankruptcy in December 2002.

`Performance Gap'

``The company still has a serious restaurant performance gap to close,'' wrote Renaissance Capital in a report. ``Restaurant- level operating margins and average hours of operation, while improving, still significantly trail those of its competitors.''

Chidsey, Burger King's former chief financial officer, was promoted in April to CEO to replace Brenneman, who returned to his private-equity firm TurnWorks Inc. Chidsey joined Burger King in March 2004 and also served as president of the Americas and its North America unit.

Burger King's IPO follows one in January by McDonald's Chipotle Mexican Grill Inc. The share price doubled on Chipotle's first day of trading and the offering raised $173 million.

Wendy's sold a 17 percent stake in Canadian doughnut-and- coffee chain Tim Hortons Inc. in March, raising $726.1 million.

JPMorgan Chase & Co., Citigroup Inc., Goldman, Sachs & Co. and Morgan Stanley are the underwriters.

Burger King has more than 11,100 restaurants worldwide and posted sales of $1.94 billion in the year ended June 30.

James McLamore and David Edgerton opened their first Burger King in Miami in 1954. Three years later, the company added the Whopper sandwich. Burger King was sold to Pillsbury Co. in 1967. Grand Metropolitan Plc acquired Pillsbury in 1988 and in 1997 combined its operations with Guinness Plc to form London-based Diageo.

Burger King announced plans for the IPO in February.