3G Capital partners review the acquisition of Burger King: 30% IRR over 14 years, "strong brand over operation" is the entry opportunity

In November last year, CPE Yuanfeng and RBI Group, the parent company of Burger King, announced a strategic cooperation. The two parties will establish a joint venture, Burger King China, with CPE Yuanfeng holding 83% of the shares. Following the cooperation between McDonald's China and CITIC Capital, this is another case where the majority stake in the Chinese business of a global fast - food chain brand has been acquired and operated by a Chinese PE institution. After the transaction is completed, RBI Group will hold approximately 17% of the shares.

Looking back at the development history of RBI Group, it has evolved from a single - brand company (Burger King) to a food and beverage group with multiple brands such as Tims Hortons. The starting point was the acquisition by 3G Capital, a PE institution based in Brazil. Previously, "Mingliang Company" also sorted out 3G Capital's model of "investing in only one project per fund" and its recent investments.

In 2010, 3G Capital privatized Burger King for approximately $4 billion. This deal was not widely favored at that time. The company's growth was slowing down, the relationship between franchisees and the headquarters was tense, and the market lacked confidence in its long - term prospects. However, it was this project that allowed 3G Capital to earn dozens of times the return. Co - partner Alex Behring once said that the initial equity investment in the RBI deal was about over $1 billion, and the final return was about 28 times, with an internal rate of return of about 30% over 14 years.

Looking back after 14 years, this deal with an initial equity investment of about $1 billion has ultimately become one of 3G's most representative cases. It not only brought dozens of times the return but also became a concentrated manifestation of its "long - term holding + in - depth operation" model in the food and beverage industry.

In an episode of the podcast Capital Allocators in May 2024, Alex Behring and Daniel Schwartz, co - managing partners of 3G Capital, detailed the formation process of the Burger King deal and conducted a review of the post - deal operations, integration, and other aspects.

The two said that 3G initially did not view Burger King as a problem company that needed to be "fixed" but rather as an asset whose brand influence was greater than its business performance: It is a global fast - food brand with a history of over 50 years, covering more than 80 countries and having approximately 12,000 stores. However, its profitability and growth rate lagged behind those of its major competitors. For 3G, this mismatch of "strong brand but weak operation" meant a clear space for intervention.

Regarding this deal, 3G conducted several months of intensive research, including store visits, interviews with franchisees, international market benchmarking, and a review of historical operations. Finally, they formed a judgment: The problems Burger King faced at that time were more phased rather than permanent damage at the business model level. The two mentioned that a key contradiction at that time was that franchisees were under pressure to make a profit, and the headquarters and franchisees were even involved in lawsuits. In 3G's view, whether franchisees can make money is the core of whether the franchise system can be established in the long term.

After the acquisition, 3G started with team restructuring and efficiency improvement and then gradually shifted the focus to growth. The well - known "zero - based budgeting" played a role, but the two emphasized that it was not the main source of value creation in this deal. In contrast, more importantly, it was to establish a new management team, reshape the organizational culture, strengthen equity incentives, and set clear goals for store opening, sales, and capital return. Subsequently, 3G further promoted Burger King's expansion in markets such as France, China, and Brazil. After the business improved, it went public again. Finally, based on this, it acquired Tim Hortons and gradually developed into today's RBI Group.

This interview not only presents the complete path of a classic acquisition deal but also provides a sample for understanding 3G's approach: It is not just about buying assets at a low point and cutting costs but about trying to find sustainable amplification space among the brand, organization, and capital structure. For 3G, the importance of Burger King lies not only in it being a successful investment but also in validating the possibility of replicating the "owner - operator" model in the US market.

Co - partner Alex Behring said in the interview that the initial equity investment in the RBI deal was about over $1 billion, and the final return was about 28 times, with an internal rate of return of about 30% over 14 years. However, 3G believes that although the outside world pays much attention to zero - based budgeting, its direct contribution to overall value creation is not high. The main sources of return are still organic growth and external acquisitions.

According to 3G's explanation, the core of zero - based budgeting is that when examining expenses and capital expenditures, one should first not be influenced by existing figures and industry benchmarks but assume that the enterprise is in a state of restarting operations and re - judge which expenditures are necessary. Then, compare the "starting from scratch" result with the enterprise's existing expenditures and industry levels, and form judgments and implementation plans accordingly. 3G regards it as a cost - examination method starting from the business.

The following is part of the interview content compiled by "Mingliang Company":

Q: Ted Seides, host of Capital Allocators

A: Alex Behring, co - managing partner of 3G Capital

D: Daniel Schwartz, co - managing partner of 3G Capital

Identifying Opportunities: Brand Influence Far Exceeds Business Scale

Q: Daniel, how did you initially find a target like Burger King?

D: It was around 2009. We were researching various potential acquisition targets at that time. Burger King came into our view during our regular screening of consumer goods companies: we would look at companies with a valuation multiple below a certain level and an enterprise value below a certain scale. After we saw it, we conducted a large amount of research from the outside in and gradually formed an investment logic, which was roughly like this: This is a great business with a good business model.

We might be among the early ones to realize the value of the "fully franchised" model. We considered it an iconic brand with a history of over 50 years. We also spent a lot of time researching the company's history, starting from the 1950s. Looking back, you'll find that since its establishment by McLamore and Edgerton, from the 1950s to the early 2000s, the company had changed hands several times.

Despite the continuous change of ownership and management, this brand still developed into the world's second - largest hamburger fast - food chain, with about 12,000 stores in more than 80 countries at that time. It would be extremely difficult to replicate such a system from scratch.

So we thought this was a good enterprise based on a good business model. When we compared its organizational structure, cost structure, and growth curve with those of its peers and other companies we were familiar with, we believed that if we took over, there was definitely an opportunity to manage it better. I remember we did some preliminary research, and Alex shared it with you. You grew up in Brazil, and you told me at that time: "No, you don't understand. I'm very familiar with Burger King." I was quite surprised then.

A: Yes. I first came to the United States in the early 1970s and went to Miami, where I had relatives. I ate at Burger King every day. There was a store on 41st Street in Miami, and we still own that direct - operated store. I went there almost every day. Later, after the deal was successful, even my partners started to half - jokingly doubt whether this story was true. Many years later, my mother passed away. She had a habit of keeping everything. I found a letter she wrote to me on January 16, 1975, in her house. It clearly stated that I went to Burger King to eat Whoppers every day and didn't like going to McDonald's at all.

I've always been a fan of Burger King. Looking back now, it's interesting because one of the conclusions we reached after research was that the scale of Burger King was significantly smaller than the influence of its brand. In other words, the brand was much larger than its business scale at that time. This was an excellent opportunity. On the one hand, the brand itself could continue to grow; but a better opportunity was to let the business grow to match the scale of the brand.

D: Although this wasn't written in the investment memo, the enterprise value of this deal was about $4 billion, and the equity investment was just over $1 billion. I asked my then - fiancée, who is a doctor, and my mother, who is a lawyer: "How much do you think Burger King is worth? McDonald's is worth about $80 billion, and Yum! Brands was worth about $30 billion at that time. What about Burger King?" For us, we only needed to invest a little over $1 billion in equity to complete the privatization. Their typical answers were: 'I don't know. If McDonald's is worth $80 billion, is Burger King worth $40 billion? Or $20 billion or $30 billion?' At least intuitively, it made sense. It wasn't that it could be bought with just a little over $1 billion in equity.

Research and Judgment Before Acquisition

Q: Before you actually tried to privatize it, you needed to do a lot of in - depth research to confirm it was worth pursuing. How in - depth do you usually conduct your research before deciding to make a move?

D: Usually, it's several months of very intensive and in - depth research. We research the industry, the company's history, the enterprise itself, and its peers. We spend a lot of time visiting stores, not only its own stores but also those of its competitors. Alex and I also established relationships with several franchisees at that time. We traveled across the country, got to know them, communicated with them, asked questions, and learned how the company actually operated and how it could operate better.

We also conducted a very detailed benchmarking analysis: for example, in certain countries, how many stores Burger King had compared to its peers; what the local single - store economic model was like; and how the profitability of Burger King's stores in certain countries compared to that of its peers. Ultimately, all investments are the same - we need to confirm there is a large enough margin of safety. That is, based on the post - transaction perspective, the purchase multiple must be low enough so that people like us, even if we don't do it perfectly, probably won't mess things up.

Q: So you had already done so much work before actually buying. I'm also curious. In the research process, how many companies do you usually invest this level of effort in before deciding "this is the one"?

D: The best way to put it is that we might buy a company every few years, but we research many companies. A mutual friend once asked Alex: "Didn't Daniel bring you the idea of Burger King?" Alex said: "Yes, but you should see the other hundred he brought before."

A: That's true.

D: We look at many companies, and we research many of them deeply. To be specific, Burger King was the one we researched the most deeply at that time because we were extremely excited about it.

A: Another thing is that we saw "executability" in Burger King. Sometimes you see very interesting companies but can't see a path to closing the deal. But in the case of Burger King, we saw it. Because it had been privatized a few years ago, that LBO was very successful, and then it went public again. And those sponsors were gradually exiting through large - scale share sales. We also didn't see any strategic buyers coming to acquire it. So we judged that if someone was willing to pay a premium to privatize it again, they might be willing to negotiate.

D: There are two more points worth adding here. First, this was already a very successful investment for the previous owners, and they made several times their money. Second, at that time, the company was objectively facing difficulties: its growth was very slow, and the store growth rate was only a little over 1%.

A: The number of new stores opened was also very small, only about a hundred per year.

D: And there were significant contradictions between the franchisees and the US headquarters at that time, and there were many lawsuits going on.

A: One of the core disputes was a "one - dollar double - cheeseburger" product. For franchisees, they were losing money on every one they sold. And the most crucial point in the franchise model is that if you want to have a fully franchised brand, it must be good for all parties involved to be sustainable. Whether franchisees can make money is the most core thing in this business. So this was a very serious problem at that time. Franchisees were extremely dissatisfied and sued the company because of it.

I think one of the very important things we did was to distinguish these short - term problems and noise from the company's long - term structural advantages. This is always the key in investment analysis: There is always a reason why an asset is cheap. The question is whether the reason is structural or temporary? And it's usually very difficult to distinguish between these two situations. We were very lucky this time, and the research helped us. Dan and the team involved in this project did an excellent job, which gave us enough confidence in the long - term structural advantages of this business and confirmed that most of the current problems were only short - term in nature.

D: Looking back, everything is obvious.

A: (Looking back) It's always like this.

D: But at that time, the situation was actually very complicated. No one else came out to bid, and the general view in the media was that either we were overpaying or we simply didn't know what we were buying.

A: During our internal investment committee discussion, a very reasonable objection was that the original owners of this company were several extremely successful and respected private equity institutions, and they had already made a lot of money. So what did we see that made us willing to pay a premium of more than 40% above the market price to buy it at that time? What exactly did we think we could achieve to justify such a price?

How to Contact, Negotiate, and Complete the Deal

Q: When you're ready to make an offer, the target company often has many vested - interest parties. For example, private equity shareholders may want to exit, while management hopes to keep their positions. How did you decide on the contact method and how to make the acquisition offer at that time?

A: I had a good relationship with the managing partner of one of the three private equity shareholders, so I called him first. He was a bit surprised but willing to talk and introduced me to the then - chairman and CEO. I flew to Miami and had lunch with him. I thought his incentive mechanism was reasonable: he had been in this position for many years and had done a good job because the investment returns were good and everyone was satisfied. And it also meant that he held a considerable amount of equity himself. So both the management and the core shareholders were actually open to the negotiation.

Q: What was the process from the first contact to the final deal?

A: It was about six months of back - and - forth negotiations.

D: Some background is needed here. It was 2010, right after the global financial crisis. There were few deals at that time, let alone large - scale deals.

A: Interestingly, after the financial crisis, a core topic in many negotiations was to convince the seller that you could actually get the financing. It's hard to imagine today, but in 2010, a $4 - billion LBO was an extremely rare large - scale deal after the crisis. We did a long - term roadshow, and at that time, the market and stock prices were still very volatile, which also made the deal more complicated.

D: From the time we started negotiating to the final signing, there were some periods when the leveraged debt market was actually very weak. In a sense, it was even temporarily "closed".

Q: So how did the final bidding process unfold?

A: The final result was about the same as the price we initially proposed. We started at around $24 per share, but then the market environment and financing environment changed, and the equity market also had a significant correction, so our offer was adjusted downward for a while. This was intuitively strange, like "bidding against ourselves". Later, we raised the price a bit, but then the stock price dropped again. In short, it was