Invest Like the Best with Patrick O'Shaughnessy
· Patrick O'Shaughnessy, Alex Behring, Daniel Schwartz
[00:00:00] S0: Very nice handwriting. [00:00:00] S1: Writing to my dad, saying I ate in this place called Burger King and that I ate Whoppers every single day. And then I worked, growing up during college, as a tour guide for Brazilians that came to Disney World in the U.S. And people just loved Burger King. It was a well-known brand in Brazil. Everyone you talked to and their cousin knew what Burger King was. There were no Burger Kings in Brazil. And then eventually, by the time we bought the company, there were like, maybe a dozen. So, this is illustrative of the fact that Burger King, not only in the United States, but globally – brand was much bigger than the business, which was a unique opportunity. Because to grow a brand like that is very hard. A lot of time and dollars. In the case of Burger King, yes, we can grow the brand further, but it was about... [00:00:00] S0: Easier to grow burgers than brand. [00:00:00] S1: Easier to open stores of a brand that everybody already wants. [00:00:00] S2: When we found the company on one of our screening exercises and we ran some math, we concluded it would take a billion and change dollars of equity capital to buy Burger King. At the time, McDonald's was, I don't know, say, like an 80, $90 billion company. Yum was a $30 billion company. And Burger King just felt like there was this mismatch. Obviously, we did a lot of work to justify and support this thesis that the brand was bigger than the business. But even just the very first glance, we both said, it doesn't make sense. [00:00:00] S1: This sounds wrong.
· Alex Behring, Daniel Schwartz, Patrick O'Shaughnessy
[00:00:00] S1: This sounds wrong. [00:00:00] S2: This sounds wrong. Of course, Alex is like, "You sure the share count's right? Missed some shares or something?" It didn't look right, but he made sure we got the share count right. And it didn't meet the smell test. And we asked some people around us. And I said, in the past, I asked my then-fiance, who was like a doctor, and my mom who was a lawyer – who are objectively smart, but not in finance. "McDonald's is $90 billion. What do you think Burger King's worth?" [00:00:00] S1: No one said a billion. [00:00:00] S2: No one said a billion. They're like, "I don't know, 20 billion, 30 billion." And so it met that smell test. And we did a lot of work to support the view that we would be able to run the business much, much more profitably from an EBITDA standpoint, from a cash flow standpoint. And if we got a few things right, we can grow it much faster, too. [00:00:00] S0: What was wrong? So obviously something had to contribute to the fact that it only took a billion of equity capital to buy the thing. What was the issue? And then what were the early levers that you used once you owned?
· Patrick O'Shaughnessy, Alex Behring, Daniel Schwartz
[00:00:00] S0: What was wrong? So obviously something had to contribute to the fact that it only took a billion of equity capital to buy the thing. What was the issue? And then what were the early levers that you used once you owned? [00:00:00] S1: Well, there are two or three things, right? One of them was, we were not focused on being a great franchisor. We were operating too many restaurants in too many places, in too many countries. And that was not a great source of focus, and it muddled the organizational structure. It muddled the clarity of what we were trying to do. That's something that we fixed. Where they had almost 2,000 restaurants around the world. [00:00:00] S2: Different go-to-markets, some master franchise, some multi-franchise, some company. [00:00:00] S1: Then, secondly, we didn't have the partners, the right partners in the different parts of the world where the potential was the greatest. Namely Brazil, China, France. France was a huge opportunity for us. [00:00:00] S0: It was zero, right? [00:00:00] S1: It was zero. And now it's the second – 2 billion euro in sales – largest market in the world for us, and so on. Türkiye. We have to have the right partners around the world to grow the business. [00:00:00] S2: And domestically, the issues that the company was having with its franchisees.
· Daniel Schwartz, Alex Behring
[00:00:00] S2: And domestically, the issues that the company was having with its franchisees. [00:00:00] S1: It's a great business, quick service restaurant franchising. But you need to never lose sight of the fact that it's a good business if you make money long-term and your franchisees make money long-term. And there were some things going on in the U.S. back in the day where there were promotions where sales grew because of a dollar double cheeseburger, but the franchisees were unhappy and losing money on that, and they were suing the company. There were real issues around tension around this that we had to fix. I mean, those are the three, I think, main levers early on. [00:00:00] S2: From an outside in, we felt that the company could be run a lot more efficiently. I think there was a $400 million and change of EBITDA. [00:00:00] S1: Which became even more apparent once we...
· Alex Behring, Daniel Schwartz, Patrick O'Shaughnessy
[00:00:00] S1: Which became even more apparent once we... [00:00:00] S2: Once we simplified the business. Exactly. And they were basically spending overhead that exceeded EBITDA, and CapEx was about half the EBITDA, despite the fact that it was 90% franchised at the time. And so we felt like we would be able to run the business more efficiently, fix some of these problems, and we could create a lot of value. And look, in hindsight, yes, it was a great deal and as mentioned like, 25 times return. But at the time, these were real issues. And I think we had an early appreciation for the strength of the franchise business model that the broader market subsequently more greatly appreciated in the years to come. But look, at the time, no one else showed up. And there was a go-shop, window shop, whatever they call it, and no other private equity firm showed up. And I'd say the consensus at the time was that we overpaid. [00:00:00] S1: As the newspaper headlines... [00:00:00] S2: Yeah. [00:00:00] S1: ...communicated. [00:00:00] S2: We bought it from extremely savvy investors who had made a great return on their investment, too. I think they made five-plus times their money on the acquisition of Burger King that they did a decade prior. [00:00:00] S0: Maybe the same question I asked – I liked how you gave such a simple, elegant explanation of Hunter Douglas. Why is Burger King and the franchise model a good business in the first place?
· Patrick O'Shaughnessy, Alex Behring, Daniel Schwartz
[00:00:00] S0: Maybe the same question I asked – I liked how you gave such a simple, elegant explanation of Hunter Douglas. Why is Burger King and the franchise model a good business in the first place? [00:00:00] S1: Because if you happen to own a brand that is large and meaningful enough that you can have entrepreneurs around the world put their capital and their work into growing the business, investing to grow the business, and help finance the marketing to maintain the brand sharp and current. I think to the extent you own such a business, it's just a great business model and something that can grow in a very efficient way globally. However many businesses you look at, it's hard to find those traits in the business. [00:00:00] S2: It's a highly free cash flow generative, royalty-based model centered around these iconic brands that we get to own. [00:00:00] S1: And again, you have entrepreneurs aligned with you all over the world, really. 140 countries, that are… [00:00:00] S2: Great operators who are going to grow the brand and they will earn their profits and they'll grow the size of the brand for us as the brand owners. [00:00:00] S0: Maybe just as like a little vignette in this story, how did you take it from zero to two billion in France? What was the literal story of what happened?