Burger King Bid Already Peaked

by Jon Ogg | September 2, 2010 1:28 pm

Burger King Bid Already Peaked

Burger King Holdings, Inc. (NYSE: BKC[1]) seems to be one of the few stocks with a bid under its shares that is not trading at a premium to its implied acquisition price. CNBC’s David Faber announced this morning that 3G Capital was going to acquire Burger King for $24 per share in cash, an announcement which was then confirmed by Burger King’s management in a press release.

In mid-morning trading, Burger King shares were up 24% at $23.41 on more than a whopping 60 million shares. However, I do not think this bid will go much higher. Burger King went private in 2002, and then came public again in 2006. It has had a very rocky road since, and the fact that Burger King hit $30 in 2008 is not likely to matter.

Faber’s original report was that Burger King was fetching 9 times EBITDA. If you use June 2011 fiscal estimates from Thomson Reuters of $1.35 EPS, the $24 price implies 17.7 times forward earnings estimates. If you blend the 2010 and 2011 estimates on McDonald’s Corporation (NYSE: MCD[2]), you get a blended estimate of $4.75 EPS. A share price of $74.90 generates a forward earnings multiple of 15.7.

Options volume has been overtaken by less active strike prices because Burger King was at $16.45 a mere two days ago before the bid emerged. At that time, the prior 52-week trading range was $16.31 to $22.19.

We’ll skip over the analysis and number crunching, but right now a bid of $25 or higher for Burger King seems to carry only a 10% chance of coming to fruition over the next month. Part of that is from less active strike prices and newer strike prices, but that is how small of a chance the current out-of-the-money calls are pricing in.

It seems that investors hoping for a higher premium buyout are figuring out that they better look elsewhere in the fast food burger chains. Wendy’s/Arby’s Group, Inc. (NYSE: WEN[3]) is a secondary beneficiary this morning as shares are up 5.7% at $4.36, and that is on top of a 21-cent rally on Wednesday. Jack in the Box Inc. (NASDAQ: JACK[4]) is also up in hopes of further consolidation with shares at $22.30, up 5.7%, after closing up 91 cents on Wednesday.

Follow Jon Ogg on Twitter @jonogg[5].

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Endnotes:
  1. BKC: http://studio-5.financialcontent.com/investplace/quote?Symbol=BKC
  2. MCD: http://studio-5.financialcontent.com/investplace/quote?Symbol=MCD
  3. WEN: http://studio-5.financialcontent.com/investplace/quote?Symbol=WEN
  4. JACK: http://studio-5.financialcontent.com/investplace/quote?Symbol=JACK
  5. @jonogg: http://twitter.com/jonogg
  6. Download our FREE trading guide here.: http://investorplace.com/order/?sid=WU3156

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