Buy out to cash in

One group of people in particular is waiting for Diageo’s quarterly results with bated breath. Burger King’s management team is hoping to take the corporation private in a buy-out. With start-up funding hard to come by these days, an MBO is on

When Diageo posts its interim results on February 21, it could signal a major career step for senior managers at its Burger King subsidiary in Miami. The drinks giant is poised to offload the troubled burger chain, and many observers believe it will opt to sell Burger King to the management team, which it has brought in over the past two years, rather than choosing a trade sale or stock market flotation.

BK chief executive and chairman John Dasburg – a former Northwest Airlines boss, who joined BK last February – and the team of ex-colleagues he has assembled have pulled out all the stops to turn around the underperforming chain, launching everything from veggie burgers to chicken Whoppers.

Diageo chief executive Paul Walsh has said that Burger King will not be off-loaded until it has experienced two consecutive quarters of growth. On February 21, the world will find out if the raft of innovations put in place by Dasburg and marketing chief Chris Clouser – another old Northwest hand – have succeeded in boosting sales.

Investments can go down as well as up

Either way, many observers believe a management buy-out is imminent. If the MBO goes ahead, it will highlight once again an enticing path open to senior marketers working in large corporations. For inside most marketers is an entrepreneur, fighting to get out. Over the past few years, the siren call of the technology boom has lured many marketers away from the relative security of their corporate positions on to the rocks of Internet and “m-commerce” businesses. Since the technology downturn and the collapse of most of these hopeful dot-coms, the lucky ones have found their way back to posts with established brands, while others have sunk without trace.

Today, ambitious marketers who want to hone their entrepreneurial skills (and make a big stack of cash) must hope for the chance to take part in an MBO, a rather safer option than joining a start-up. The financial rewards can be great. The buy-out of food and beverage manufacturer Premier Brands from Cadbury in 1986 was led by former marketing director Paul Judge, who netted &£45m when the business was taken over three years later. But it is not just financial rewards that encourage marketers to get involved in buy-outs.

Chris Fuller, head of marketing at personal care manufacturer Accantia, was part of the management team that bought the business out of Smith & Nephew in June 2000. It was a classic MBO: S&N wanted to focus on making medical equipment and its consumer marketing division fell outside this strategic vision. The management team led a buy-out with &£140m backing from banker ABN Amro. Fuller denies the deal has made him rich. He says: “I still drive a Vauxhall. It was not a licence to print money, but there are other reasons to get involved. The marketing organisation in Accantia has unlocked its own entrepreneurial spirit. My team of a dozen or so marketers has been able to plan things that were not possible in a bigger organisation.”

Being independent of a giant corporation makes Accantia faster on its feet in developing new products, and more flexible in marketing them. “There are some risks, but the benefit is that we are our own masters, not having to look over our shoulders at a large global corporation,” says Fuller.

Accantia’s backers are likely to refinance the deal at some later stage, though Fuller plays down the prospect of the managers becoming particularly wealthy from this.

This independence from a giant corporation could be particularly welcome for Burger King, which has been accused by some of its franchise-holders of being leaden-footed in its approach because it is part of a Diageo machine that sees its future solely in terms of premium drinks and has little interest in hamburgers, flame-grilled or otherwise.

In reality, Dasburg and his executives are more of a management buy-in team – entrepreneurial managers who have formed a team with the express purpose of buying out a business, rather than being lucky enough to be in the right place at the right time.

A market past its sell-by date?

BK differs from other buy-outs, which tend to be of businesses in growth markets, where marketing skills can be used to improve sales and margins. Burgers are, if anything, in decline. Trends towards eating more healthily and an over-supply of burger bars mean the sector is likely to contract in the near future rather than expand. The chain’s turnover in the year to June 2001 stood at &£1.042bn – an increase on the previous year – but operating profits fell to &£177m from &£202m. More worryingly, same-store sales were down by four per cent.

However, Dasburg and his team have some advantages on their side. As a retail business, BK generates a lot of cash, attractive to any investor. And as Sudi Sudarsanam, professor of finance and corporate control at Cranfield School of Management, points out: “The management knows how desperate Diageo is to get BK off its hands, which puts them in a strong negotiating position.”

Observers believe the MBO team will get BK for about &£1.6bn, considerably less than Diageo had hoped for and less than it might have raised from a flotation. Sudarsanam says the advantage of an MBO for Diageo is that it represents a clean break – a flotation usually involves the parent keeping some stake in the business. He adds that, for an MBO’s financial backers “a good management team is very important”.

James Farnham, who was part of the team that bought out Taunton Cider for &£72m in 1991, believes that the relationship between backers – usually venture capitalists – and MBO teams has changed over the past decade. He says: “Unfortunately, the venture capitalists have become too greedy. They recite the mantra about the critical success factor for any MBO being the quality of the management team, but in reality the slice of the cake left for the management when it does eventually sell up is much smaller now than it was ten years ago.”

He adds that a successful MBO requires a “special breed” of marketer: “Extravagant plans for long-term brand investment tend to be less important than ensuring steady net profit growth. Unfortunately, the latter is thought to be less appealing to many marketers because of the need for hard-nosed pragmatism in managing short-term marketing tactics, but such entrepreneurialism is the vital requirement for MBO marketing.”

Farnham adds that picking the right stage in the economic cycle is often the key for successful MBOs, and believes that the best time for an MBO is just at the end of a recession, since backers have more confidence that they will be able to float or sell the company later.

Even the bosses won’t buy them now

According to the Centre for Management Buy-Out Research, which is co-sponsored by Barclays Private Equity and Deloitte & Touche Corporate Finance, the value of the MBO market fell last year for the first time since 1993 – it was worth some &£18bn in 2001, compared with &£24bn in 2000 – as the effects of the downturn and September 11 took hold.

But Deloitte & Touche head of private equity Mark Pacitti predicts that MBOs will be back in fashion by the end of the year, as there is still plenty of finance around in various funds. While technology stocks are out of favour, he believes that consumer marketing businesses, providing they are performing strongly, will be attractive to investors.

Pacitti says: “If financial backers see a business with a good brand and potential, it gives them an angle to buy cheap, improve performance and sell the business later. The question is: do we feel the existing management team can improve the performance but have been held back by the company, or do we need a new management team?”

And he adds there’s no need for marketers to sit around fatalistically hoping that they will be in the right place at the right time to take part in an MBO – they can become part of a management buy-in team. It is a question of identifying growth businesses whose owners want to sell and where improvements can be made on the existing management.

Whether Dasburg, Clouser and the team have been successful in the initial stages of their turnaround strategy for BK will be known next week. But the real test for the team and its backers – rumoured to be investment company Texas Pacific – will be whether they can maintain steady profit growth even after a buy-out.

Their experience may provide marketers elsewhere with just the encouragement they need to consider taking over unwanted divisions at their companies, or even to consider identifying business targets and setting up their own buy-in team.

The dot-com gold rush demonstrated that marketers like to put themselves at the forefront of exciting new trends, though in this case many behaved more like lemmings than strategic thinkers. The technology boom may well have whetted entrepreneurial appetites. Becoming part of a buy-out or buy-in team is likely to be one of the few ways to satisfy these over the next few years.

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