QSR (Restaurant Brands International) was formed as a combination of THI and BKW completed in the
end of 2014, and presents a compelling, evolving, long-term opportunity. It is the third largest
restaurant company by sales and operates in over 100 countries through two separate brands. Burger
King is the world’s second largest fast food hamburger restaurant chain (14,372 locations, 99.6%
franchised) . Tim Horton’s is the leading Canadian quick service restaurant, known for coffee and baked
goods (4,671 locations 99.7% franchised)
Admittedly, the single most important variable in this combination is 3G. The 51% owners of the
combined entity, 3G Capital have built a solid record of imposing new efficient structures on top of
existing brands, with multiple success stories (most recently at BKW itself) of cost cutting, capex
management, capital allocation, and international expansion.
Since the merger closed in Dec 2014 the stock peaked at $45 only to roll back to $38, where it started
the year. Still not cheap compared to its peers, but with the initial excitement out of the stock we find
this level to be a very reasonable entry point, given what we expect to become another successful 3G
story. This view is particularly reinforced by the very confident performance in the most recent quarter.
As the new name and ticker suggest, the company is intended to become another one of 3G’s platform
businesses (like Kraft/Heinz and Inbev) designed to apply proven blueprints to multiple brands. It is
therefore crucial for the new entity to demonstrate the ability to support Tim Horton and Burger King
brands in the near term, before adding any new businesses to this international master franchise
The market currently values QSR at ~16.7x consensus ‘16 EBITDA, which is only marginally richer than
the other all-franchised peers (DNKN 16x, DPZ 15.5x). Given the 3G track record, the new company’s
vast scale and platform status, we feel the stock deserves a higher multiple, but holding the multiple at
current levels for now, upside to the stock price will need to be driven by improved profitability and
growth. Both are areas of expertise for management. Let’s see what 3G has done at BKW in the first 3
years of ownership.
1. Aggressive overhead cost cuts. Between its Zero Based Budget approach (where each year’s
budget is built from scratch rather than updating the previous year’s blueprint) and
refranchising they were able to shrink G&A by $178m (45%) in 3 years. This is where over 80% of
ebitda growth came from.
2. Less relevant for the QSR story, but just to illustrate management’s effectiveness, further margin
expansion was driven by refranchising 1,300 of company low-margin stores and shifting to an
asset-lite model. Lowering the capex requirement also dramatically improved FCF.
3. With the use of the master franchise agreements 3G accelerated international unit growth from
168 units (+3.7% y/y) to 710 (+12.9% y/y). Unit growth ramped up quickly starting with Brazil as
early as 2011, followed by 3 deals in ’12 (China, Russia, S Africa), and 3 more in ’13 (France,
India, Mexico) with more to come. The impact of these agreements is still being realized.