Popeyes and Burger King: The New Fast-Food Superpower?

Restaurant Brands International Inc. QSR announced its $1.8 billion acquisition of Popeyes Louisiana Kitchen Inc. PLKI yesterday, and it helped the fried chicken giant’s stock sizzle upward 19% to $78.77 per share. RBI stock rose 7% Tuesday to $57.50 per share.

Popeyes is up again after early afternoon trading Wednesday to $79.04 per share. But RBI is down 3.04% to $55.85 per share.

According to RBI, the acquisition will be paid forwith cash on hand and financing commitments from J.P. Morgan JPM and Wells Fargo WFC. The merger is set to close by early April 2017.

Here is everything else you need to know about the deal to help make sense of the massive fast-food merger.

Power Players

In 2014, Burger King purchased Canadian coffee and sandwich giant Tim Hortons for roughly $11 billion. At the time, the two companies combined for $23 billion in revenues. The newly formed fast-food powerhouse stock closed 2016 at $47.66 per share, up 27% year-over-year.

But there is much more behind the initial Burger King and Tim Hortons merger that paved the way for yesterday’s Popeyes announcement. And it includes the joining of forces of Warren Buffett’ Berkshire Hathaway (BRK.A) and a less well-known private equity firm.

In 2010, Brazilian private equity firm 3G Capital paid $1.56 billion in cash and debt refinancing to take control of Burger King. Two years later, 3G sold 29%of Burger King to a few big investors. Then, in 2014, Buffett’ Berkshire invested $3 billion in the Whopper maker right before it acquired Tim Hortons. And RBI was officially formed in Dec. 2014.

Then, in 2015, the two massive investment firms helped to broker the mergerof Kraft Foods Group Inc. and H.J. Heinz Co., now The Kraft Heinz Company KHC. The merger created one of the biggest packaged food conglomerates in the world.

But the deal only began to take shape after Buffett’s Berkshire and 3G bought Heinz in early 2013 for roughly $23 billion.

The two big-time multibillion-dollar power brokers tried and failed just last week to merge Kraft Heinzwith the British and Dutch company Unilever for $143 billion. The recent failure, in part, sparked the Popeye’s merger as the companies were hungry for an acquisition.

3G Capital’s co-founder Jorge Paulo Lemann is known for his ruthless bottom line cost-cutting tactics. For instance, at Burger King, 3G sold the company jet and moved executives from upscale offices to an open floor of cubicles.

“As Popeyes becomes part of the RBI family we believe we can deliver growth and opportunities for all of our stakeholders including our valued employees and franchisees,” RBI CEO Daniel Schwartz said in a press release.

“We look forward to taking an already very strong brand and accelerating its pace of growth and opening new restaurants in the U.S. and around the world."

But Popeye’s can expect some shake up because Brazilian company also replaced 11 of the top 12 Heinz managersafter its take over. And within two years of the initial acquisition, 7,000 employees were fired.

Louisiana Fast

Popeyes opened 45 years ago as Chicken on the Run, a traditional Southern-fried chicken restaurant, in the suburbs of New Orleans. Since then, the chicken company has gone through some major changes.

The first official Popeyes franchise opened in 1976. Less than 10 years later it had expanded to 500 locations. By the mid-1980s, Popeyes had become the third largest fried chicken chain in the U.S. But in 1989, the chicken chain’s founder Al Copeland, tried to purchase his next closest competitor, the second-largest chain Church’s Chicken, and it practically bankrupted him.

In 1992, America’s Favorite Chicken Company was formed and it purchased both Popeyes and Church’s. Since then, the chain has taken off. Popeyes opened 216 new stores in 2016 after opening 219 in 2015.

Popeye’s currently has over 2,600 chains across the U.S. and 25 other countries, almost all of which are franchised. The average annual revenue per location was $1.4 million in 2015.

Fast-Food Business

The fast-food industry has become complicated in recent years. A more health-conscious America has sought out healthier fast casual options. This leaves Popeyes’ place in the fast-food food chain up in the air.

Chipotle Mexican Grill, Inc. CMG, which once looked poised to take over the quick dining industry, has plummeted for varying reason over the last two years. But Panera Bread Company (PNRA) has climbed to an all-time high in 2017, despite an up-and-down recent two years.

Still, more traditional fast-food chains have fought back by continually slashing prices.

The Wendy’s Company WEN fell off a cliff starting in 2006, but since then, it has slowly climbed over the last five years. Yum! Brands, Inc. YUM, the owner of KFC, Pizza Hut and Taco Bell, has faced stock volatility in the last five years. Today, it is near an all-time high.

McDonald’s Corporation stock MCD has been on the rise since the beginning of 2017. But the industry standard barer only holds roughly 16% of the American fast-food market.

RBI added a total of 32 new Tim Hortons and Burger King locations in 2016, after opening just one in 2015. Tim Horton's grew 2.4% in the fourth quarter 2016, while Burger King grew 8.5%.

Only time will tell just how quickly the “Louisiana Fast” Popeyes will grow behind RBI, Buffett and 3G.

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Popeyes Louisiana Kitchen, Inc. (PLKI): Free Stock Analysis Report
 
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