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The Auction of Burger King

Group 1

In any auction, usually the objective is to get the maximum price possible. However, in
financial auctions a lot of times, there is more to the final deal value than what meets the eye.
The 4 bids received for the Auction of Burger King, ranged from $1.8 bn to $2.375 bn. Each
bid has a different cash and debt component and bids of Firms X and Y also have warrants
and convertible preferred stock respectively. There are also different conditions attached to
each bid.

Firm W’s Bid: In this bid, the cash consideration is $1.8 Billion. Here Diageo will still own 19.9%
of Burger King. This will be a good thing for Diageo if Burger King performance improves but
will be bad if the recent slump in Burger King’s performance continues.

Firm X’s Bid: This bid is $205 million more than that of Firm W. Cash consideration is financed
by similar debt as in firm W’s bid but there is more equity that is being put up by Firm X. Also,
Firm X is financing higher portion of debt by senior debt compared to Firm W.

Firm Y’s Bid: This bid has a higher total value than Firm X’s bid, but the cash component is
slightly less at $1.9 billion. This is because they are also issuing convertible preferred stock
worth $200 million, which will pay a dividend of 7.25% (around 15 million annually) and are
exercisable anytime if Y’s share cross $28. Also, they are financing the deal by bridge loans
and a permanent financier hasn’t been found. Even if the company receives $1.45 bn of bridge
loan, the debt to equity ratio for Y will be very high which might lead to Y’s stock price
decreasing in the future.

Firm Z’s Bid: This bid seems to be the best with the highest deal value and cash component
but there is a catch here. The bid will be subject to downward adjustment in cash
consideration if operating profit performance of Burger King deteriorates significantly
between signing and closing of deal. This time period is usually a few months. So, if Burger
King’s performance continues declining as it has been for the past few months, the deal
amount can be significantly less.

Comparing all the factors mentioned above and Greenhill’s consideration of other factors
apart from price, we believe Firm Y’s offer is the best. Not only will they get a good amount
of cash up-front, but they are the only firm which has an experience of managing restaurant
chains and that might be useful in turning around the fortunes of Burger King. Also, if they
are successful in turning around Burger King, Diageo will get a change to convert the preferred
stock into common stock at a discounted price.

We also believe that Firm Z’s offer is the second best on the table, not only does it give a
largest amount of cash, the equity invested in Burger King is also the highest. The only
downside is that if Burger King’s operating performance deteriorates, the cash portion will be