Fast food chain Burger King may tie up with PE firm Everstone Capital to enter India

US-based fast food chain Burger King, which had reportedly revived its plans to enter India recently, is tying up with private equity firm Everstone Capital for rolling out franchisee-run outlets in the country, as per a report in The Economic Times quoting sources.

The fast food giant has held discussions with various potential partners in India down the years but had failed to sew a deal. However, the firm has gone ahead with a major push outside its home market over the last two years and the entry into India can be seen as part of the strategy.

According to ET, the global chain has partnered with private equity firm Everstone Capital who will own a majority stake in the venture and the operations would be led by Burger King’s chief in the UK, Rajeev Varman. It will also have an unnamed Mumbai-based property developer as a shareholder.

The report added that the venture plans to invest $100 million to set up 500 outlets in the country over the next 7-10 years as a franchisee of Burger King, who will also own a minority stake.

Repeated calls to spokespersons of Everstone Capital did not elicit a response. We will update when we hear from them.

Burger King’s strategy

The firm, which was acquired by New York-based investment firm 3G Capital three years ago, went public again last year and has been expanding to new markets as McDonald’s and Wendy’s pumped up competition in the home market.

Its last annual report said, “We believe that international development will be one of the principal drivers of long-term growth of the business and value for our shareholders.”

The firm has been moving away from its company owned outlets towards franchised operations as a strategy. It is looking at creating strategic joint ventures with accelerated development targets, in which it would retain a significant minority equity interest without deploying new capital. This is reflected in its reported India plans.

During 2012, it entered into joint venture agreements for China, Russia, South Africa and Central America and granted master franchise and development rights for each market. It also entered into an agreement with its largest franchisee in Mexico to establish a joint venture in that country. In each joint venture, it paired a proven local operator with a strong financial partner while retaining an equity stake and board seats.

Last year it also entered into development agreements with franchisees in Singapore, Malaysia, Vietnam, Korea, the Nordic countries (Norway, Sweden and Denmark) and Colombia.

Competition in India and challenges

For Burger King, India has been a lost opportunity and an entry here would complete its presence across all key large emerging markets. The firm opened its first outlet in South Africa (the S in the oft quoted set of large emerging markets in BRICS) early this year.

It has been looking at an India push for over six years now. In the same period its key global rival McDonald’s has seen the revenues from the country grow at a compounded annual growth rate of around 28.5 per cent. In the last five years alone (FY08-FY13) its revenues have shot up over threefold to around Rs 1,300 crore, based on revenue clocked by its franchisees in the country (for more on that click here).

McDonald’s operates through two franchisees in India, of which one also happens to be a joint venture. The firm has been embroiled into a legal tussle with its Indian joint venture partner. Its other partner recently brought the franchisee operations under a listed firm and raised fresh capital.

Moreover, Jubilant FoodWorks, which runs franchisee for Domino’s Pizza chain in the country, has also entered the burger business as an extension of Dunkin’ Donuts brand.

The market is clearly dominated by McDonald’s, which entered India in 1996 and has over 300 outlets now. But Burger King has a much more aggressive rollout plan.

One big challenge it would face is finding the right location for the outlets. In many markets Burger King and McDonald’s outlets are literally a stone’s throw away. However, given high real estate costs in the country, it could be challenge to find a sustainable model with a fast rollout plan.

Moreover, with entry of new players in the QSR business, including coffee chain giant Starbucks and emerging home grown chains, Burger King would face a bigger competition than what McDonald’s faced previously.

Everstone’s move

Although a few PE firms have invested in near fresh ventures in hospitality and infrastructure, the move by Everstone Capital to bring in Burger King would be one of the rare cases where it dons the role of a joint venture partner with a majority stake against an investor in existing operations.

But it is in line with its exposure in the restaurant business and its wider focus on consumption as an investment theme. It already has a controlling stake in Pan India Food Solutions, which operates a host of restaurants, including Noodle Bar, Copper Chimney, Spaghetti Kitchen and the local franchisee of US-based Coffee Bean & Tea Leaf.

It also picked a large stake in JS Hospitality Services which has brands such as Pind Balluchi.

Recently it also acquired SGX-listed Harry’s Holdings which brought a string of restaurant brands under its fold. It is also said to be mulling bringing them to India.

With Burger King, it would be making its biggest bet as part of this strategy.

The attraction for the business is a no-brainer. One of the two franchisees of McDonald’s is just short of a billion dollar market value. Given its existing experience in the space and development of food services industry in the past, it is now relatively easier for it to roll out a new QSR chain.

In addition, the success of Jubilant FoodWorks would add to the topping. The firm, which was also backed by PE firms in initial years and was forced to go public to provide an exit to the investors, found the fancy of stock investors post listing. It already commands a market value of more than $1 billion.

Everstone could be looking to spin such a story with the move to bring Burger King.

(Edited by Joby Puthuparampil Johnson)

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