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It only seems like Bill Ackman spends every waking moment haranguing Canadian Pacific Railway's management. Instead, in his spare time, the activist investor has been preparing the iconic U.S. fast-food chain Burger King Corp. for a public offering, with shares set to trade in June.

At this time, we offer no comment about Mr. Ackman's plans for CP. But a look at his Burger King presentation, coupled with the disclosure of the proposed stock offering, makes us wonder, in the words of Burger King competitor Wendy's: Where's the beef?

Indeed, the success of Wendy's Co. highlights how Burger King's return to the public markets – its second IPO since 2006 – comes at a suboptimal time for the chain. Wendy's overtook Burger King in U.S. sales in 2011 for the first time, dropping the chain to third place (the mighty McDonald's is first).

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Per Mr. Ackman's own presentation, Burger King's average sales per restaurant in North America sit at $1.15-million (U.S.), with Wendy's at $1.46-million and McDonald's at $2.43-million. Closing the sales gap with Wendy's, Mr. Ackman says, would increase "EBITDA minus capex," or earnings before interest, taxes, depreciation and amortization minus capital expenditures, by about $200-million, or 40 per cent of the company's 2011 figure.

Is Burger King poised to do that? Clearly unclear. Mr. Ackman is only able to tout four consecutive months – from December through March – in which Burger King's North American same-store sales increased. The numbers were profoundly negative for much of 2011; the company's securities filings say it closed out 2011 with a decline of 3.4 per cent in same-store sales. (Its international locations, where growth was better, weren't enough to make the companywide number positive for 2011.)

When a buyout firm affiliated with Mr. Ackman took Burger King private in October, 2010, it was widely assumed the tough turnaround decisions would be made out of the public's eye. One of the presumed fixes was a significant investment in restaurant remodelling and upgrades: John Gordon, principal of California-based restaurant consultancy Pacific Management Consulting Group, wrote in a blog post on Seeking Alpha that at the time of the 2010 going-private transaction, Burger King had a capital-investment backlog of at least $2-billion.

Well, Mr. Ackman has a plan for that: Get the Burger King franchisees to pay for it. Various media reports have suggested the franchisees haven't bought into the idea, and Mr. Ackman's own numbers make clear why.

He suggests a franchisee who selects a $250,000 "low cost remodel" can achieve a 10-per-cent sales uplift and generate extra EBITDA of $28,000.

But, says Mr. Gordon, the restaurant consultant: "The problem is no one in the quick-serve restaurant space has achieved that. McDonald's gets double-digit same-store sales bumps with a scrape and rebuild, but that is not what we're talking [about] Jack in the Box has done a nice job of remodelling, but reported low/minimal lifts in 2010-11, for example. The norm is single digits."

Substitute a 5-per-cent sales lift in Mr. Ackman's model, and the EBITDA is around $14,000 – barely more than the $12,000 in interest costs a franchisee incurs by borrowing 80 per cent of the remodelling project at 6 per cent annually (again, Mr. Ackman's example.)

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Much of the Burger King case is based on similar beef-patty-in-the-sky projections; Mr. Ackman says that while the company currently has just over 5,000 locations worldwide, it has the potential for more than 23,000, based on the U.S. rate of penetration of one restaurant for every $2-billion in gross domestic product.

The "reasonable" multiple for a newly public Burger King, Mr. Ackman believes, is 13 to 16 times EBITDA minus capex, a metric likely chosen because the company spends barely any money at all on capital expenditures. At the top end of that range, Burger King would trade above McDonald's, which has already executed on nearly everything Mr. Ackman hopes Burger King can do.

At some point soon, someone may suggest to you that buying Burger King shares gets you a piece of a top-flight fast food company. That, I submit to you, would be a Whopper.

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About the Author
Business and investing reporter and columnist

A business journalist since 1994, David Milstead began writing for The Globe and Mail in 2009. During eight years at the Rocky Mountain News in Denver, Colo., he individually or jointly won nine national awards from SABEW, the Society of American Business Editors and Writers. He has also worked at the Wall Street Journal. More

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