Episode Transcript
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more. Hello
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I'm Ted Sides and this
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is Capital Allocators. This
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show is an open exploration of
1:02
the people and process behind Capital
1:04
Allocation. Through conversations with
1:06
leaders in the money game, we learn
1:08
how these holders of the keys to
1:10
the kingdom allocate their time
1:12
and their capital. You
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can join our mailing list
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capitalallocators.com. All
1:21
opinions expressed by Ted and podcast guests
1:24
are solely their own opinions and do
1:26
not reflect the opinion of Capital Allocators
1:28
or their firms. This podcast is for
1:30
informational purposes only and should not be
1:32
relied upon as a basis for investment
1:34
decisions. Clients of Capital Allocators or podcast
1:36
guests may maintain positions and securities discussed
1:38
on this podcast. 3G
1:41
Capital's buyout of Burger King may
1:43
be the most successful private equity
1:45
deal you've never heard about. Over
1:48
the last 14 years, where the length of
1:51
a typical private equity fund, 3G
1:53
turned a $1 billion investment into
1:55
$28 billion in value. The
1:59
annual dividends from the investment accruing
2:01
to 3G today are
2:06
around 70% of its invested capital. The
2:11
deal is one of the highest earning buyouts
2:13
ever. 3G is an organization with a
2:15
storied history. Founded by
2:18
Jorge Paolo Lamon, Carlos Alberto
2:20
Sicupira, and Marcel Harmon Teles,
2:22
the group created an owner-operated model of investment.
2:25
They rose to prominence through building the largest
2:27
beer company in the world, initially
2:29
buying local brewer Brahma in 1989, expanding
2:33
it and merging with a competitor to become
2:35
Ambev in 1999, merging
2:38
with Eterbrew to become Imbev in
2:40
2004, and taking
2:42
over Anheuser-Busch in 2008 to become AB Imbev.
2:48
Twenty years ago, Alex Behring, a
2:50
young star on their team, moved
2:52
to the U.S. to form 3G Capital
2:55
and take the approach abroad. Burger
2:58
King was the second largest hamburger fast
3:00
food chain after McDonald's in 2010, when
3:03
3G took it private. What
3:06
it accomplished since then has been
3:08
extraordinary. My guests
3:10
on today's show to discuss 3G and
3:12
the deal are Alex
3:14
Behring and Daniel Schwartz, co-managing
3:16
partners of 3G Capital. Our
3:19
conversation covers the history of 3G, Alex's
3:23
journey to form 3G Capital, and
3:25
the 3G Playbook. We
3:28
then dive into the deal, covering the
3:30
sourcing and deal dynamics, improving
3:32
operations, growing the business, taking
3:34
the company public unexpectedly, and
3:37
reloading to buy Tim Hooten's Popeyes
3:40
and Firehouse Zos. Today's
3:43
Burger King is part of Restaurant Brands
3:45
International, a public company with a ticker
3:47
QSR, a
3:50
$32 billion market cap, and
3:52
$50 billion enterprise value. This
3:55
classic deal will widen your aperture on
3:57
what's possible with the long-term compounds of the
3:59
market. holding period and operational.
4:04
Before we get going, it's early May.
4:07
Time for April showers to turn to
4:09
May flowers for the NBA and NHL
4:11
playoffs to kick into high gear, for
4:14
colleges to head for summer vacation, and
4:17
for gatherings of investment professionals at
4:19
the Berkshire Hathaway annual meeting in
4:21
Omaha, followed by the Milken Global
4:24
Institute Conference in California. If
4:27
you made it to Omaha this
4:29
year, you're likely buzzing with excitement
4:31
from the conversations, friendships, and warms
4:33
continued wit and wisdom. If
4:36
you're headed to Los Angeles for
4:38
Milken, you're likely buzzing with anticipation
4:40
for the discussions you'll hear, people
4:42
you'll see, and festivities you'll attend.
4:45
So whether you're on your way to
4:48
Hollywood, or like most, experiencing a touch
4:50
of longing, what better way
4:52
to taste greatness than listening to this
4:54
week's show? Maybe it's
4:56
a coincidence, just maybe, that
4:59
this week's guest, 3G Capital,
5:01
discusses a Berkshire-affiliated investment in
5:03
a leveraged buyout. Not
5:06
a bad way to bridge the gap
5:08
between the two icons that draw many
5:10
across the United States from around the
5:12
world. And if you tell
5:14
your friends, colleagues, and peers about it,
5:16
you can bond without the FOMO that
5:19
might otherwise come. Thanks
5:21
so much for spreading the word. Please
5:24
enjoy my conversation with Alex
5:26
Barring and Daniel Schwartz. Alex,
5:30
Daniel, thanks so much for joining me. It's
5:32
a pleasure. Alex, why don't
5:34
we start with a full
5:36
background of 3G? So
5:39
Ted, we started 20 years
5:41
ago originally as a family
5:43
office of my co-founders, so
5:46
just house capital. And
5:49
what we intended to do
5:51
originally was to replicate this
5:54
approach of being long-term operating
5:56
owners of good businesses, a
5:59
model that was originally developed in
6:01
Brazil and it was
6:03
subsequently companies took it all
6:05
over the world and then
6:08
we wanted to attempt to do that outside
6:10
of Brazil and that was sort of the
6:12
inspiration to set up 3G Capital in
6:14
New York City at the time. And
6:17
how did you come to join the organization?
6:20
So I had joined the
6:22
organization approximately a little less
6:25
than eight years or nine
6:27
years before out of the Harvard Business School.
6:30
I joined out of school in the
6:32
predecessor of Private Equity Farm. They were
6:34
starting in Brazil and
6:37
initially I started as an analyst. I
6:40
evolved to become a partner and
6:42
most of my time there I
6:45
spent running one of the portfolio companies.
6:48
This company there was a result
6:50
of multiple railroad privatizations in Brazil
6:54
and that was a continuation
6:56
of the model that had worked
6:58
so far to the extent that
7:01
the partners were able to acquire good business, one
7:04
of the partners would take a CEO role in
7:06
that business. So I was a
7:08
continuation of that approach and
7:10
I ran the company all the way to
7:12
taking it public and
7:15
early 2004 transitioned
7:17
to a board role and moved
7:19
my young family to New York
7:21
City to start 3G Capital.
7:24
This owner-operator playbook,
7:27
what does that mean? It
7:30
ultimately means that we get
7:32
very, very hands-on in the
7:34
business that
7:36
we attempt to
7:39
chart a path of value
7:41
creation in the business that
7:43
essentially typically has three phases
7:45
to it. It
7:47
does have an initial phase where
7:50
we try to put together
7:52
a team that combines some
7:55
people that understand all ways
7:57
of doing things. Frankly,
8:00
on back end leadership, like
8:02
CEO, and then back
8:04
end position, CFO, purchasing,
8:06
and things like that. And
8:09
we try to combine that with
8:11
people from the business on the
8:13
sales, marketing, front of the house
8:15
jobs. And
8:18
we try to initially make this first
8:20
phase of the business more efficient. That
8:23
frees up cash flow, it frees up
8:25
focus to enhance or
8:28
resume, however the case may
8:30
be, organic growth. And
8:33
hopefully by the time we've established the
8:35
basis of a culture and the
8:37
business is clicking, we are able
8:39
to source inorganic M&A
8:43
growth opportunities. So that
8:45
is the process we typically go
8:47
through. When you think about
8:49
our way of doing business and
8:52
driving efficiencies, 3G has been well known
8:54
for a long time for this concept
8:56
of zero-based budgeting. Would love
8:58
to hear how that actually works when
9:00
you first step into a company. Yeah.
9:03
I mean, Ted, I probably should preface
9:05
this by saying we had this big
9:07
returns in companies like RBI and where
9:10
I think we made 28 times
9:12
the original billion plus capital we
9:14
put in. We had
9:16
a 30% IRR in 14 years and all
9:18
and things like that. And
9:21
in spite of all the publicity the
9:23
zero-based budget gets, the
9:25
portion of that value creation that is
9:27
directly associated with the efficiencies and therefore
9:29
with the zero-based budget is small. I
9:32
mean, frankly, the majority of that growth
9:34
came from again, the organic and the
9:37
inorganic growth. But having said that
9:39
as a means of introduction to your questions,
9:42
the zero-based budgeting process essentially
9:44
attempts to look at the expense
9:47
and the capital expenditure base without
9:50
for a moment abstracting yourself
9:52
from the existing numbers
9:54
and from the peers. As if
9:56
you were starting the business at that moment, what would
9:58
you need? And then of course, you're
10:01
going to have to compare there with what you have,
10:03
what the peers have to make sense of it and
10:05
derive actions and so on. But it's an approach where
10:07
you take an intellectually honest grassroots
10:10
view of cost. It
10:13
brings ownership and accountability to
10:15
cost. It's
10:17
about looking at costs as if you
10:19
are the owners of the business as
10:21
opposed to just the employees who are
10:23
fine spending whatever budget is set for
10:25
them. If you look at the
10:28
history of the deals you've done, you're
10:30
buying what you think is a good business
10:32
to begin with and then you're applying this
10:34
lens of efficiency. What are
10:36
some examples of things that you found that
10:39
you were able to, let's just say, take
10:41
some costs out or drive efficiency that you
10:44
might think from the outside, well, it's a
10:46
good business. It's already run well. I
10:49
definitely characterize it by saying we're trying to
10:51
bring an owner-operator approach
10:53
to all facets of the
10:55
business, be it cost
10:57
or growth. You look at
11:00
Burger King, this is a business that was
11:02
operating at the time we bought it in
11:04
80-plus countries that had a
11:06
50-ish year history of successfully expanding
11:08
into the second largest fast food
11:10
hamburger chain in the world. Yet
11:14
when we looked at it, it wasn't operating
11:16
as profitably as its peers and it wasn't
11:18
growing as fast. Coming
11:20
in, having a new refresh team
11:23
with goals around cost management, goals
11:25
around capital management, goals around growth
11:28
in terms of the number of
11:30
restaurants that this business should be
11:32
opening each year and
11:34
setting these bold, ambitious goals and
11:37
hiring the right people and empowering the
11:39
right people at the company to achieve
11:41
them allowed us to catapult the business
11:44
to that next level. Before
11:46
we dive into Burger King, I'd love
11:48
to hear the broader history of the
11:51
investments you've made at 3G Capital. It's
11:53
quite a different model when people think
11:55
about a private equity organization. the
12:00
approach at 2G Capital with a more traditional
12:03
private equity approach. I think the
12:06
three main points that would make is
12:08
one, we are the largest investors, we
12:10
the partners and affiliated entities are the
12:12
largest investors on these vehicles that do
12:15
the deals. Number one, number
12:17
two, each vehicle is
12:19
deployed entirely in one situation. So
12:22
it's a hundred percent concentration and
12:25
thirdly the intent with this business
12:27
is always to be there
12:29
for the long long term. My
12:32
co-founders have been investors of
12:35
AB & BEV now coming on 35 years.
12:37
We investors in
12:39
RBI for 14 years now
12:42
and counting. In terms
12:44
of your question on the sequencing, we
12:47
had an investment in CSX which
12:49
was a railroad which
12:51
was our first way of getting
12:53
our say tools in the water
12:56
by virtue of not being involved in management
12:58
just at the board. It was
13:00
quite a successful investment for us multiple
13:03
times our money on a declining market in
13:05
the mid-2000s and so there was a
13:08
crisis which by the way favored
13:11
people to focus on efficiencies and
13:13
things that we could have provide
13:15
ideas and that was a good
13:17
investment but also it reinforced
13:20
it to us that the end game
13:22
was to control something and be involved
13:24
in management and that in fact happened
13:26
at Burger King in 2010 and its
13:28
subsequent acquisitions
13:31
of another three brands in the course
13:33
of the last many years. Then
13:35
we had an acquisition of Heinz. The
13:38
Heinz investment was successful, we made
13:41
several times our money on the big private
13:43
Heinz. Then we had the craft
13:45
investment which was merged with
13:47
the Heinz investment but was a totally
13:49
separate vehicle. That investment we
13:51
just basically got our money back wasn't
13:54
a successful investment but it validated a
13:56
fundamental premise of ours which is I
13:59
mean we're not a venture capital. capital for the
14:01
downside case must
14:03
be capital return or
14:05
capital preservation like return of
14:07
sorts and of course, that's
14:10
one of the key things that drives business
14:12
selection, business quality, it
14:14
drives capital structure decisions. For
14:17
example, the next fund was the fund that
14:19
bought Hunter Douglas in which we
14:21
only leverage the business four times. So
14:24
that's part of the approach again that we have and
14:26
then we have of course, the ability to do another
14:28
deal. So that's sort of the sequence. In
14:31
this model where you're putting all
14:33
your resources into a deal at a time,
14:35
what does your team look like to execute
14:37
this? Leadership
14:39
that comes from someone that's a
14:42
partner here typically, many
14:44
CEOs, sometimes CFO, some
14:47
back end functions with people that have experience in
14:49
our system that worked in different deals with us,
14:52
people from the business that have experience and
14:54
knowledge and by the way, people that will
14:56
take advantage of a great opportunity to
14:59
invest themselves or to roll their equity or
15:01
to get more equity in the deal into
15:04
the front of the house rolls
15:06
and then over time, we bring a lot of
15:09
young talent in so
15:11
that the company breeds its
15:13
culture and breeds its talent over time and you
15:16
can see the result of that in the company
15:18
like RBI where today, 80% of the
15:21
leadership team is people that are growing into the
15:23
company. How do you
15:26
think about the type of culture you'd
15:28
like your portfolio companies to breed? That
15:31
sounds repetitive but it's culture that if
15:33
there's one word I could use, it
15:35
would really be ownership. People
15:37
who genuinely care and act like
15:40
owners of the business that they're
15:42
running and so there's this line
15:44
that sometimes there's delineation in our
15:46
organization. We don't like to think
15:48
of that being delineation between ownership
15:50
and management. The people who
15:52
are running the company are the people who own the
15:54
company and I think it results
15:56
in them being more entrepreneurial. It
15:59
results in them. bringing this owner's lens to
16:01
the business, thinking about what's in the
16:04
best interest of the company,
16:06
which is also what's in the best interest of
16:08
the shareholders as opposed to thinking, oh, what's in
16:10
the best interest of the management. In our world,
16:12
we like those to be blended together. And I
16:14
think the reason it's compelling, if you
16:16
look at the history of restaurant brands and Burger
16:18
King, I'd say we're willing
16:20
to give people a shot,
16:23
maybe a little bit earlier than they get
16:25
a shot elsewhere. I think
16:27
that allowed us over the history of
16:29
the company to attract very
16:31
talented, very ambitious people who, as Alex
16:33
mentioned, are frankly the folks who are
16:36
running the business today. Well,
16:38
there's probably no better way of getting a
16:40
feel for this than diving into one of
16:42
these companies. So let's do that with Burger
16:45
King. And, Daniel, maybe the place to start
16:47
is when you're bringing this
16:50
approach to really taking
16:52
over a company and running it, how
16:54
do you go about finding a business
16:56
like Burger King to buy? We
16:59
were looking at businesses to buy. This was back
17:01
in 2009. We're
17:04
looking at all sorts of different companies, and we
17:07
found Burger King in one of
17:10
the regular screening exercises that we
17:12
do of consumer businesses that are
17:14
trading below a certain multiple, below
17:17
a certain total enterprise value. And
17:20
we saw it. We did a
17:22
whole bunch of outside in research on
17:24
the business, and
17:27
we developed a thesis basically
17:30
around the company that looked something like
17:32
the following. Great business, great
17:35
business model. I think
17:37
we were probably early to have
17:40
an appreciation of the fully franchised
17:42
business model and the value of
17:44
the franchise business model. We
17:47
felt that it was an iconic brand
17:49
that had been around 50-plus years. Actually,
17:53
we spent a lot of time studying the
17:55
history of the business from the start, from
17:57
the 1950s. if
18:00
you went back in time, you'd
18:02
learn that the business after
18:04
being founded by Macklemore and
18:07
Edgerton was subsequently sold
18:09
several times between the 1950s and
18:11
early 2000s. And that resulted
18:15
in a series of management changes over
18:17
the years. And what
18:19
we found interesting was that
18:21
notwithstanding this frequent changing in
18:24
ownership and management, the
18:26
company flourished into the second largest fast
18:28
food hamburger restaurant chain globally, at the
18:30
time around 12,000 restaurants,
18:32
80 plus countries.
18:35
And to replicate something like that, it just felt
18:37
like it would be really, really hard to do.
18:39
And so I felt
18:41
like it was a very good business operating on
18:43
a really good business model. And
18:46
when we compared its organizational
18:48
structure, cost structure, growth profile
18:51
relative to its peers and
18:53
to other companies that we were familiar
18:56
with, we felt like there
18:58
would be an opportunity if we were
19:00
to take this business over to run
19:03
it better. I remember we did some initial
19:05
work and Alex shared it with you. And
19:07
you grew up in Brazil and you told
19:09
me, no, I understand. I'm very, very familiar
19:11
with Burger King, which I was surprised at
19:13
the time. Yeah, I mean, I
19:15
first came to the US in the early 70s
19:18
to Miami. I had family living there.
19:20
And I used to eat a Burger
19:22
King every day. There was the store
19:25
on 41st Street in Miami, which
19:27
we still own. It's a company store. And I
19:29
used to go there every day. And then of
19:31
course, after the deal became successful, there
19:33
was some degree of suspicion even amongst
19:35
my dear partners, whether
19:37
the story was true or not. And
19:40
ultimately, several years later, my mom passed,
19:42
she had a habit of keeping everything. So
19:45
I found this letter at
19:47
her home from me in January
19:50
16th of 1975, basically
19:53
describing I went to Burger King
19:55
and ate Whoppers every single day. I
19:58
never liked to go to McDonald's. I
20:00
was a hardcore Burger King
20:02
fan and it was interesting to see
20:05
because as one of the outputs
20:07
of the analysis was ultimately
20:10
that the business of Burger King
20:12
was significantly smaller than the brand. I
20:15
mean it turned out that I wasn't alone. So
20:18
the brand was a much bigger thing
20:20
than the business which is a great opportunity
20:23
meaning of course there is growth
20:25
of the brand but growing the business to
20:27
become the size of the brand is a
20:29
better proposition. And while it
20:32
didn't make the investment memo, the
20:34
enterprise value of the deal was around 4
20:36
billion, it was just over a billion in
20:38
change of equity to buy
20:40
the company. I had asked
20:42
my then-fiancee and
20:45
who's a physician and my mom who's an
20:47
attorney. So look McDonald's is around 80 billion
20:49
dollars or so, yum, I think at the
20:51
time is 30 billion. What do you think
20:54
Burger King is worth? So for us, there
20:56
was that billion of equity. The
20:58
typical answer was I don't know, half. McDonald's is worth
21:00
80, maybe Burger King is worth 40. Or
21:02
20. Yes, it met the
21:04
smell test. Not one. Not one.
21:07
Not one in change of equity capital required to
21:09
do a take private. So before you
21:12
try to take the business private, how
21:14
do you go about the depth of
21:16
work required that gets you
21:18
comfortable that this is something that you should
21:20
spend your time going after? Many
21:23
months of intense
21:26
in-depth research, studying
21:29
the industry, studying the history
21:31
of the company, studying
21:33
the company, studying its peers, spending
21:36
a lot of time visiting
21:38
restaurants both of the company
21:41
and the peers. I remember
21:43
Alex and I developed relationships with
21:45
several franchisees. We
21:47
tore the country in developing relationships with people
21:50
and just learning and asking questions about how
21:52
the business is being run and how it
21:54
could be run better. Detailed
21:57
benchmarking around. of
22:00
restaurants that the brand had
22:02
in certain countries compared to
22:04
what the peers had, understanding
22:07
those underlying unit economics of how
22:10
profitable the Burger King restaurants were
22:12
compared to the peers in certain
22:14
countries, ultimately getting comfortable
22:16
that I know it sounds cliche
22:19
but with any investment making sure
22:21
that there is a large enough
22:23
margin of safety if you will,
22:25
the pro forma entry multiple was
22:27
low enough that even folks like
22:29
us probably wouldn't mess it up.
22:32
So you're doing all this work before
22:34
you even try to buy it and
22:36
I'm curious in your research process how
22:38
many different types of projects or different
22:40
companies are you studying with that intensity
22:42
to decide okay
22:45
that's the one you're gonna go knowing from the beginning
22:47
you may or may not be able to buy anyone
22:49
in the public markets that you like. Probably
22:52
the best way to explain it is we'll
22:55
only buy one business every
22:57
few years but
22:59
we study a lot of that. A
23:02
mutual friend of ours asked didn't Daniel bring you the
23:04
Burger King idea and he said yeah but you should
23:06
have seen the hundred other people.
23:10
We look at a lot of different businesses we
23:13
go pretty deep in many of them I'd say
23:15
we definitely went deeper in Burger King than anything
23:17
else at the time because of how excited we
23:19
were. Also there we had
23:21
a sense of actionability at
23:23
Burger King which sometimes you can see
23:25
something that's very interesting but you don't
23:28
see a path to completion and
23:30
in Burger King we saw that path because
23:33
it was a company that had been taken
23:35
private years before it was a successful LBO
23:38
had been taken back to the public
23:40
markets and the sponsors were in the
23:42
process of sequentially exiting the
23:45
business through blocks. We
23:47
couldn't really see any strategic buyer for
23:49
the business so we
23:52
figured that they might be
23:54
amenable to an approach for someone
23:56
that wanted to pay a premium in the market and
23:58
take the company private again. It's probably
24:00
worth also adding a couple of things. One, it was
24:02
a very good deal for the prior owners. They
24:05
had made several times their money. And two,
24:07
at the time, the business was struggling
24:09
objectively. It wasn't growing all that much.
24:11
I think the trailing growth rate for
24:13
restaurants was around one and change percent.
24:15
It wasn't opening debt, I mean, restaurants
24:18
at all, almost 100 restaurants or so.
24:20
There was a big issue with the
24:22
franchisees and the franchisor, the parent company
24:24
in the US at the time. There
24:26
were multiple ongoing lawsuits were
24:29
centered around a
24:31
dollar double cheeseburger sandwich that
24:34
was a money loser for
24:36
franchisees, which is one
24:38
of the key things in this business is
24:40
it's a great business to have a fully
24:42
franchised brand, but it needs
24:45
to be very good for everyone to
24:47
be sustainable, meaning your franchisees
24:50
making money is left, right
24:52
and center of this
24:54
business. This was a real problem. People
24:56
were very disgruntled as a function of
24:58
that. They were suing the company. I
25:01
think what we were able to do is
25:03
we're able to separate the short term issues
25:05
and the short term noise associated with those
25:07
issues from the fundamental
25:11
promising long term tenants of the business. I
25:13
think that's one of the key things on investment analysis. Usually
25:17
things are depressed, valuation of things is
25:19
depressed for a reason. And
25:21
again, that reason may or may not
25:23
be structural and sometimes it's hard to
25:26
differentiate that. I think we're lucky
25:28
that in this case our analysis helped us and Dan did
25:30
great work on this and the team that was working on
25:32
this deal to really give us
25:34
comfort around the nature of the
25:37
structural advantages of the business and
25:39
the short term nature of the
25:41
issues. Yeah, earlier today we were talking
25:44
about in hindsight, things look quite obvious. They
25:46
always do. But at the
25:48
time, it was a really complicated situation.
25:50
No one else showed up to buy
25:52
it and I'd say the headlines were
25:54
generally that we either overpaid or we
25:56
didn't know what we bought. reasonable
26:00
bushbacks that we got as we
26:02
discussed in committee was the owners
26:04
of these businesses were some really respectable
26:06
private equity firms, ultra successful ones, which
26:09
had made a lot of money by the way. So
26:12
what was it that we saw that
26:15
we wanted to pay up I think at the
26:17
time an offer 40% premium market
26:20
to take this thing private? What
26:22
was it that we're thinking that
26:24
we could accomplish that would justify
26:27
that? As you go
26:29
to get ready to make a bid and a
26:32
lot of times companies you've got embedded
26:34
constituents. So you do have the private equity
26:36
owners who may want to be exiting but
26:38
you also have a management team who has
26:41
their jobs. How did you
26:43
decide how to go about the approach
26:45
to make the bid for the company?
26:48
I had a good relationship with
26:51
one of the three private equity owners
26:54
I called the managing partner there
26:56
and then he
26:58
was a bit surprised
27:02
but amenable to
27:04
a conversation introduced me to the chairman and
27:06
CEO at the time. I
27:09
traveled to Miami had lunch with him. I
27:12
think he was properly incentivized he had
27:14
been in position for many years had
27:17
done a good job because I mean their
27:19
payback for everybody was happy and
27:21
of course that man he was also that
27:24
meaningful equity holder the business. So
27:26
they were amenable on both sides
27:29
both management and the anchor shareholders
27:31
were interested in the conversation. What
27:34
was the process from that initial
27:36
overture to getting the deal done?
27:38
Six months of conversations back and
27:41
forth. I think it's
27:43
worth just maybe giving some context this
27:45
is 2010 this is just host global
27:47
financial crisis there weren't all that many
27:50
deals let alone large deals. It's interesting
27:52
one of the conversations you would have
27:55
at that time after the great financial
27:57
crisis was basically
27:59
convinced the sellers
28:01
in that case that you would conceive
28:06
of that today but a four billion dollar
28:08
LBO in 2010 was by far the
28:12
largest deal after the crisis. I
28:15
needed a long roadshow that was
28:17
a long process and also
28:20
after the financial crisis there was still
28:22
significant volatility to markets and
28:24
to stock prices which further complicated
28:27
matters. There were periods from
28:29
when we started the negotiation to when
28:32
we signed the transaction where I'd say
28:34
that lever debt capital markets were soft
28:36
if you will temporarily closed. So
28:38
how did the bidding for the company play
28:40
out? So we ended
28:44
up in a very similar point to
28:46
where we started. We started at 24
28:48
but then
28:51
the markets became very different and
28:53
the leverage markets became very different
28:55
than the equity markets corrected a
28:57
lot. We went down our
28:59
offer which is not the usual intuitive path.
29:02
We're bidding against ourselves though and
29:04
then we went back up but the stock
29:07
was down. So anyway so it was a
29:09
long convoluted volatile process that ended
29:11
up in a similar place. And
29:13
what was Burger King when you
29:15
bought it in terms of number of stores
29:17
on the footprint? And it was
29:20
around 12,000 stores
29:23
operating in around 80 plus
29:25
countries but I think what was
29:28
interesting about the time is that it wasn't
29:30
growing all that much. It was growing one
29:32
and a half, growing a couple hundred units
29:35
on a base of 12,000 and our competitors were
29:37
growing a whole lot more. We
29:39
paid around 4 billion and
29:42
it was doing around 450 million or so of EBITDA,
29:44
maybe 150, 175
29:49
million dollars of trailing CapEx at the time. So
29:51
high 200, 300 ish of on
29:54
leverage free cash flow and
29:57
that's what the business looked like at the
29:59
time. So once you
30:01
have control over it, you company,
30:06
what are those first steps that you
30:08
took over the first six months or
30:10
year to bring in your people
30:12
and start to make changes happen? The
30:15
first two steps we took was
30:17
a composition of the team and
30:20
subsequently addressing the efficiencies. We
30:22
had a new leadership team which is a
30:24
combination of folks from 3G. I
30:27
joined as ZFO, one of
30:29
our partners joined a CEO. We
30:31
elevated a couple of really good
30:33
people within the company, brought in
30:35
someone from the beer business that
30:37
Alex mentioned earlier to help out
30:39
in terms of people and reorganization.
30:41
We set a bold ambitious goal
30:43
for the business of trying to
30:45
be the best and the fastest
30:47
growing restaurant company globally. We
30:50
tried to create a more entrepreneurial atmosphere.
30:52
We took down all of the offices,
30:54
we took down the walls and we
30:57
created an open floor plan so
30:59
everyone could have a more collaborative
31:01
environment. As part of setting
31:03
this bold ambitious goal, we copied
31:06
a lot of what Alex did so
31:08
successfully at the railroad company in terms
31:10
of the management style to achieve a
31:12
long-term bold ambitious goal. It happens one
31:14
year at a time so we set
31:16
goals for the organization around the number
31:18
of units that we'd want to open,
31:20
the sales growth that
31:22
we'd have, the capital returns that
31:24
we'd have and we
31:27
posted those goals all around the organization to give
31:29
everyone visibility on how we were doing. So behind
31:32
people's desks you'd see their goals for
31:34
the year, red, yellow and
31:36
green metrics to create a lot of
31:38
transparency and visibility within the organization of
31:40
where it is that we were taking
31:42
the business and how we
31:44
were progressing. And as Alex said,
31:47
we felt that there was an
31:49
opportunity to run the business more efficiently and
31:51
so as part of the zero based
31:53
budgeting effort, we have compartmentalized
31:56
costs around the organization and
31:58
we made groups
32:00
accountable for what it is that they were going
32:02
to spend. We gave people budgets and we tried
32:04
to benchmark inside and outside and so if one
32:07
group was spending x dollars a year
32:10
on travel per person then the other group
32:12
should try to match that. Little things like
32:14
this, it wasn't overly complicated. But
32:17
as a result of that, we probably
32:19
as a result of that first phase,
32:21
we ended up owning the business of
32:23
a price to earnings ratio of five
32:25
or four. Yeah, it's like a 25%
32:27
free cash flow yield within
32:29
the first year or so on our equity. Which
32:32
gave a lot of margin of safety to
32:34
the investment. What was so great
32:36
about this business is that it was a
32:38
mature business in the sense that it had
32:40
a 50-year history but there was so much
32:42
opportunity to make it way, way bigger. And
32:45
so after making the business more efficient,
32:48
we really set our sights on how
32:50
do we make this the fastest growing
32:52
restaurant company globally. And
32:55
we noticed in certain countries,
32:58
the brand was stronger than in other countries
33:00
depending on how we'd go to market. And
33:03
we as a team
33:05
and board developed a
33:07
view that we should
33:09
have large, well-capitalized, master-franchised
33:11
partners with great
33:13
local operating expertise in
33:16
some of the bigger markets. So then
33:18
we set our sights on creating these
33:20
partnerships around the world and
33:22
in the first couple of years, we created
33:25
partnerships in Brazil, in China,
33:27
in France. As
33:29
an anecdote, I mean when we
33:31
bought the business in France, there
33:33
were no Burger King restaurants in
33:35
France. It's one of
33:37
our competitors more profitable markets globally
33:39
but I think we crossed two
33:42
billion in France. The biggest
33:44
market for the Burger King brand
33:46
other than the United States. Yeah,
33:48
the seeds that were planted led
33:50
to a decade plus of growth
33:52
and it's still compounding. As
33:55
we talked about earlier, that's really what allowed
33:57
this to become such a large company. Can
34:00
you break down those two aspects of
34:02
that initial goal setting? So the first
34:04
is efficiencies and the second is
34:06
growth. As you describe it, it
34:10
sounds really simple. Put a
34:12
bunch of goals in place that are tied to these
34:14
financial metrics and then it happens. What
34:16
are the aspects of driving
34:19
what seems like a very simple
34:21
way of improving efficiencies and actually
34:23
making that happen at the company?
34:26
Daniel's being humble about the zero-based budget that was
34:29
done there. I mean there were some real opportunities
34:31
in the near term to increase the beta. There
34:34
was a lot of money being spent
34:36
away from the business meaning
34:38
on more bureaucratic corporate layers and
34:41
things that really had little impact
34:43
on sales and little impact
34:45
on opening the restaurants. There
34:47
were some meaningful dollars there. Nearly
34:50
50% growth in the EBITDA. Yeah. What
34:52
are some examples of those types of expenses that
34:54
have been in place? One example,
34:57
many multi-million dollar FedEx budget that
34:59
90% of it converted to email
35:01
instead. Coming in with a fresh set
35:03
of eyes, making those hard decisions is easier said
35:05
than done. On the growth side,
35:07
I think one interesting thing I think is
35:09
this investment horizon difference that we have because
35:14
do I think we're any smarter than any
35:17
of the prior owners for example of this business?
35:20
There's no way. I mean there's some
35:22
of the smartest people that exist in this
35:24
industry. That's not the case. I think we
35:26
did have a very different time horizon. Then
35:29
for example, some of these expansion opportunities
35:31
that Dan alluded to, we're talking about
35:33
France. France became a big deal
35:35
but that's now 14 years in the
35:38
making. When you had to spend a lot
35:40
of money and attention and focus and actions,
35:43
first to source the right master
35:45
franchisee, then to make sure organize
35:47
the capitalization of that franchisee and
35:49
help them with that, then
35:51
local sourcing of ingredients, customization,
35:53
a menu, then slowly
35:55
real estate if you want to get
35:57
quality locations that can be done overnight.
36:00
So a lot of actions that
36:02
do create a lot of value but on
36:04
a longer horizon, same thing
36:06
that I said about France, I could have said
36:09
about China or Brazil. So
36:11
I think the horizon was an important
36:15
enabler of us to make
36:17
some of the decisions that we made. The
36:19
other way we got the organization excited
36:22
about the direction we were taking the
36:24
company in is frankly through
36:26
the equity ownership that we brought to
36:28
the company. Just like you did
36:30
the railroad, we had this philosophy
36:32
that for people who acted like owners and
36:35
really held themselves accountable and cared, we wanted
36:37
to make them owners in the business. And
36:39
so we granted
36:41
sizable stock options to
36:44
top 150 people in the organization to
36:46
become owners
36:49
of the business. We also let
36:51
folks who you know right
36:53
received proceeds as part of the Burger
36:56
King take private transaction. We let them
36:58
reinvest those proceeds into the
37:00
company and we leveraged them. We
37:02
gave them multiple times matching. And
37:05
the other piece that we did each year, we allowed
37:08
the top couple
37:10
few hundred people in the business to
37:13
take a portion of their bonus and
37:16
if they wanted to, they could
37:18
buy stock in what was then private
37:20
Burger King and we would match
37:22
them as well. We'd essentially give them leverage and
37:26
so we really created this
37:28
cultural alignment within the organization
37:30
that we were all
37:32
on the same team, we were all shareholders,
37:35
we were all owners of this
37:37
business that yeah we'll have to
37:40
make some tough decisions and we're gonna have
37:42
to do certain things differently if we want
37:44
the next five years or ten years to
37:46
look a little bit different than the last
37:48
five. But I think everyone
37:50
was aligned. Everyone was in the same boat
37:52
with respect to where we needed
37:55
to take the company. As
37:57
you're working through that and buying
37:59
the existing company and really starting
38:01
a more rapid expansion. It's
38:04
hard to get all those people decisions right.
38:06
I'd love to hear how you thought about
38:08
assessing people along the way. I
38:10
think this goal system that we have is
38:12
a great facilitator at that.
38:15
Evaluating people will never be 100% objective but we
38:18
had at least an objective basis to start from
38:20
in terms of the goals
38:22
for the year and how did that person
38:24
stack up against those goals and not
38:26
only if they achieve them or not but what is it
38:28
exactly that they did or didn't do.
38:32
So we had a system to do this
38:34
quarterly and at the end
38:36
of the year became apparent in I would say
38:38
in 80% of the cases, it
38:40
was pretty easy to differentiate who
38:43
was doing more and
38:45
deserved more responsibility and deserved
38:47
more equity versus
38:49
who didn't. And
38:52
we were fortunate there were a lot of great
38:54
people at the business in 2010 who'd meet
38:57
with these people and we'd ask them say, what
38:59
do you think we could do better? And there
39:01
was no shortage of great ideas and there were
39:03
a lot of people who were
39:05
promoted who really bought into what
39:08
we were trying to do and they
39:10
had both the knowledge and experience in
39:12
the business and the ambition. I'd
39:14
say we also spent a lot of time
39:17
recruiting folks out of business school. I
39:19
would make regular trips to business schools,
39:22
get the resume books in advance and
39:25
cold email folks who I
39:27
thought had impressive resumes and if you
39:29
get an email from say cold email
39:31
CEO or CFO of this company I'm
39:33
on campus and do you want to
39:36
meet, I got a nice response rate
39:38
and for people who seemed really ambitious
39:40
and wanted to do something big, something
39:42
maybe different, we would make offers on
39:44
the spot and we hired a lot of great people. As
39:47
a result of that, you look today our CEO is
39:49
37. Our CFO
39:51
is hired out of HBS. Oh, the same,
39:53
you know. Mid 30s. The
39:55
president of international was also hired out
39:57
of the MBA program. These
40:00
people have all been with us decade plus. But
40:02
it goes back to what Alex is saying. I think that
40:05
speaks to the long-term ownership
40:07
horizon. The folks we hired, it's 2024.
40:09
A lot of these folks we hired, we hired 2012, 2013, 24.
40:13
They grew up throughout in the organization and we
40:15
knew that a decade in, they added incredible amount of
40:17
value. But you have to make a long-term bet on
40:20
these folks. How far along
40:22
in the trajectory of changing the business did
40:24
you start thinking about acquisitions?
40:27
That's a great question. The
40:30
first thing that needed to change for us to do
40:32
that was our balance sheet. We
40:34
leveraged what? Puz-eye seven times six and a half
40:36
times off the gates. And we
40:39
were a few years into this process
40:41
back to two and change or three
40:43
or not even three. So
40:45
balance sheet first. So that was
40:47
the first enabler. The second is we
40:49
felt the first green shoots of what
40:52
we're doing in terms of international restaurant
40:54
growth expansion in terms of turning the
40:57
corner on the same
40:59
store sales into the domestic system.
41:02
So we saw the green shoots on the organic side
41:05
coming up and we had the balance
41:07
sheet and we had the people. So
41:10
we started to have some bandwidth in
41:12
terms of people to do more. That got
41:14
us again back on the hunt.
41:16
And kind of comfortable with the business because we
41:18
hadn't owned a restaurant company. Few
41:21
years into the business, we liked it a lot
41:23
more even than we did at the start. So
41:26
where did you turn at that point in time?
41:29
We ended up going public in 2012,
41:33
year and a half into this mid-12 and
41:35
this was a late 2010 closing. And
41:39
between the dividend that was paid
41:41
and the proceeds of selling quarter
41:44
of the business or whatever that was, we
41:47
returned 130% capital give or take. That
41:50
was made whole and we owned 70% of
41:53
the business which was at
41:55
the time, I think our IPO
41:57
valuation implied 4 or 5x multiple.
42:00
original, emotional investment which was
42:02
in and of itself recharged.
42:06
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43:15
And now, back to the show. Why
43:19
did you decide to turn around and go public so
43:22
quickly after turning it around? We
43:24
didn't. We
43:28
were approached by a SPAC and
43:31
that was basically run by
43:33
people that we respected and
43:35
knew and they wanted to do
43:37
a deal with us by virtue of which
43:39
we would have become a public company. And
43:42
of course, that was a process
43:45
in terms of discussing valuation and discussing
43:48
how to deal with some of the
43:50
incentives and things that are typically associated
43:52
with SPACs for which there was a
43:54
limited space here, given
43:57
the size of the deal. But that negotiation went
43:59
well. evaluation was compelling
44:01
enough. We respected the people that
44:03
had this back. We thought there would be good
44:05
shareholders and good partners and then
44:07
we decided to proceed. So we weren't So
44:12
now you're accidentally a public company. We were
44:14
a year or two away from it. And
44:16
then Daniel said so that plays out first
44:18
and then you start looking at expansion. Yeah,
44:20
that helped the balance sheet. We were in a $5 billion
44:23
market cap company and we
44:25
continued to grow quite nicely. We
44:27
continue to grow our system-wide sales
44:29
at attractive rates. We continue to
44:32
grow our EBITDA, our cash flow.
44:34
I think we probably reached around
44:36
at 10 billion or so market
44:39
cap company. And as Alex said, we
44:41
liked the industry. We liked the franchise business
44:43
model even more
44:45
than we did prior to
44:47
becoming owners and operators of
44:49
the company. And
44:52
we looked around the world around
44:54
different franchise restaurant concepts.
44:56
And I think
44:58
at some point we came across Tim
45:01
Hortons and felt that
45:03
it was one of the most
45:05
special businesses and brands in any
45:07
market in any category we've seen anywhere.
45:09
And Josh Kobza,
45:11
our now CEO, led
45:14
the work on that together with me and Alex
45:16
and the team here at 3G. And we
45:20
pursued the acquisition or combination
45:22
together of Burger King and
45:25
Tim Hortons. This would
45:27
have been 2014, 2015 timeframe.
45:30
The more we learned about the Tim
45:32
Hortons business, the more excited we were.
45:34
When Tim Hortons was a franchisor
45:37
of excellence, incredible franchisee
45:40
community. It had most
45:42
of the real estate in the
45:44
steel. It manufactured and distributed the
45:46
products. It was an incredible business.
45:49
It has an unparalleled brand. And I was able
45:51
to do a common friend to schedule
45:54
a dinner with the CEO of the
45:56
business in Toronto. We really
45:58
hit it off. and he
46:00
was amenable to a proposal from us.
46:04
Then as we looked through the numbers,
46:06
we needed financing, not just debt financing
46:08
but to make the numbers work properly
46:10
in the right risk adjustment
46:12
basis, we needed a few billion of
46:15
preferred equity. At that point, we had
46:17
developed a good relationship with Warren Buffett.
46:19
He was good friends with one of
46:22
my co-founders, Roger Lemma for many years,
46:25
had teamed up with us on the Heinz deal that
46:27
happened in 2013. And
46:30
we were able to approach Warren, show
46:33
him the deal, he liked the brand, he
46:35
liked the Tim Hortons brand, he was very
46:37
enthusiastic to participate in financing. So we had
46:39
all the financing lined up
46:42
and then that challenge really
46:44
became one of reaching agreement with
46:46
Tim Hortons. Processed it took several
46:48
months and back and forths
46:52
of proposals. I think the first proposal
46:54
that we sent them took
46:56
six weeks to get a response
46:58
with absolute radio silence. The response
47:00
had half a paragraph where
47:03
it politely wished us luck in
47:05
future endeavors. And then
47:07
in each case, we presented a second proposal
47:10
which was responded in three hours with the
47:12
exact same half paragraph letter. We
47:14
later learned of the boardroom dynamics there where
47:17
there were people in favor, people against, but
47:19
ultimately were able to navigate
47:22
that successfully to an announcement.
47:25
I think we started in March, I think
47:27
late August we were announcing a deal.
47:30
It was quite an interesting thing
47:33
because Tim Hortons in Canada is that gigantic
47:35
thing. I don't know that there is a
47:37
consumer brand in this country that has the
47:39
same amount of equity
47:41
and weight. So it's something you had to talk
47:43
to the prime minister about. It had
47:46
to undergo a government review process and
47:49
make a variety of commitments. It
47:51
was quite the process. For context,
47:53
this was at the time for us already
47:56
a home run of a deal. We had
47:58
returned 130%. son of
48:00
the capital, it was paying a nice dividend,
48:02
I think with 10-ish billion dollar companies, it
48:04
was a home run in all respects. And
48:06
again, I think it comes back to the
48:08
long-term nature of how
48:11
we operate and even we said
48:13
to ourselves at the time, most
48:15
rational private equity firms would have
48:18
sold versus re-levering and betting everything.
48:20
Re-levering and rebetting, re-upping everything. I
48:23
remember this is summer I'd called you, I was
48:25
the CEO at the time and I said to
48:27
Alex, I really feel strongly we should bet the
48:29
firm, we should bet the business on this. To
48:32
Alex's credit, I mean he believed in it, he
48:34
was willing to make the bet on the team
48:36
running the combined business at that point. Which
48:38
in hindsight, it's like, oh, it was really obvious
48:41
that Tim Horton's EBITDA is now 80% higher
48:43
or whatever it is and the cashflow
48:45
doubled, we've expanded it globally. It was such
48:47
a good business that even as an hour
48:49
team, we couldn't mess it up. When
48:52
a company twice has said, no thanks
48:55
and they tell you next to nothing in a
48:57
small paragraph, how do you take it from there
48:59
to a few months later getting a deal done?
49:03
We found that we
49:05
spoke to a lot, try to find channels
49:07
into the board and then of course through
49:09
those channels, gain insight
49:11
into what was going on to
49:14
understand was this a unanimous basically
49:18
no, where no
49:20
one would never do a deal
49:22
and everybody agrees or is it something
49:24
where there is some level of
49:26
discussion and different views and
49:28
it turned out to be the latter. We
49:32
felt that the business was good
49:34
enough and that we had enough
49:38
financial wherewithal to
49:41
make a better offer that
49:43
potentially would enable that side
49:45
of the argument to prevail.
49:49
And we felt that there were concerns about
49:52
us and about basically
49:55
that Tim Horton's in the past had been
49:57
sold by the EBITDA. founders
50:00
to Wendy's and
50:02
from Tim Hortons perspective,
50:05
they didn't feel that this had been a great
50:07
development for them and they
50:09
were able over time to be spun off of
50:11
Wendy's and they were independent again. The
50:14
resistance to the deal was a thought
50:16
process of do we need to be owned
50:18
by a US burger chain again and
50:20
this burger chains sometimes could be maybe
50:23
short term, maybe they won't focus
50:25
on Tim Hortons, we've got afterthought and
50:28
we felt all the opposite of that. We felt
50:30
it was a great business, we wanted to own
50:32
it and develop long term, we wanted to take
50:34
it to the world and we felt that
50:36
we could help make Tim's global and so we
50:39
felt that if we're granted the light of
50:41
day in terms of going and talking to
50:43
people at the board, they would understand that
50:45
and hopefully that's what happened and
50:47
that helped the board then evolve from a little bit
50:49
of a situation where this
50:51
is diverging points of view to
50:54
a more consensual position. It didn't
50:56
help that in the summer of 2014. Right
51:00
in the middle. Right in the middle of this, I was
51:03
traveling in India touring restaurants
51:05
that Bloomberg Businessweek had been
51:07
trying to write a story
51:09
about us, about our management
51:11
team at Burger King. The spirit
51:14
of the details, the title of the story was
51:16
Burger King is run by children and
51:20
deep dive into all of our
51:22
ages and backgrounds. I was a
51:24
CEO at the time for Josh,
51:27
Kabsar, now CEO, was our CFO, he
51:29
was 27, our head
51:31
of North America, 39. It didn't help
51:33
our cause but
51:36
I think as Alex said, eventually when we
51:38
all met and we talked to them about
51:40
the plans that we had for the business
51:43
and our global growth trajectory,
51:45
not just for Burger King but for
51:47
Tim Hortons, it all worked out. Once
51:49
you bought that brand, you have
51:52
these two levers of driving efficiency and growth.
51:54
How did you think about Tim Hortons? As
51:57
is the case with Burger King, there was
51:59
initial opportunity. to run the business more
52:01
efficiently. Also, the combination
52:03
of two distinct public
52:05
entities always creates synergies. There
52:08
were real synergies there. But ultimately,
52:10
what's driven and what's driving the value
52:12
is the global growth of Tim Hortons.
52:15
And so now, throughout
52:17
Europe, Latin America, Asia, you can go
52:20
to a lot of countries that at the time of the
52:22
acquisition, you couldn't have and have a cup of Tim's today.
52:25
And speaking to the long-term nature
52:27
of our plans and our ownership
52:29
here, that'll continue to pay dividends
52:31
and grow for decades. Also, there
52:33
was a big opportunity on the
52:35
Tim's business on a consumer CPG
52:37
level. Tim's went from
52:39
being at retail other than the stores where
52:41
we have a 75% share of coffee out
52:44
of home in Canada. But we
52:47
were not the leading brand on
52:49
home consumption. And
52:51
so that was a big opportunity. Of course,
52:53
it required agreement with the French and how
52:55
to go about that. But today,
52:58
I mean, that business quadrupled, that was a little
53:00
bit now or something over the years. And
53:02
we are the number one brand in Canada. As
53:05
you look at the real estate footprint as
53:07
you're growing, you've got Burger King internationally, you
53:09
now have Tim Hortons you're bringing out. Just
53:12
thinking of the YUM brands where they've put
53:15
the Pizza Hut alongside their other brands,
53:17
how did you think about the real estate
53:19
footprint of these two? While
53:22
there would be back of the
53:24
house synergies in terms of finance,
53:26
procurement, supply chain, legal,
53:28
we actually felt it's very
53:30
important for the brands to
53:33
maintain their own distinct brand
53:35
identity and brand management. Part
53:37
of that is real estate development and
53:40
marketing. I think it's
53:42
very important that each of these
53:44
brands has their separate management, separate
53:46
go-to-market. It'd be seen differently in
53:48
the eyes of the consumers. Now
53:51
once you have these two, you've got
53:53
them humming the way you want, you continue growth,
53:55
how do you think about continuing to expand from
53:57
there? So a couple of
53:59
years. later I'd say like second
54:01
half of 2016 we
54:04
began studying... Malachute the leopard
54:06
from it. We
54:09
were delivering and we began
54:11
studying some of the other
54:14
categories and at that
54:16
point we were in coffee, in
54:19
burgers, one of the fastest
54:21
growing categories both in the US and globally
54:23
is chicken and we felt that we ought
54:25
to have a presence in chicken. We identified
54:29
Popeyes as a
54:31
natural potential addition to the
54:33
portfolio and we
54:35
did quite a bit of work on
54:37
that business understanding it, understanding its growth
54:40
potential. It would be a
54:42
very different transaction than Burger King and Tim's
54:44
because it was much smaller. At that
54:47
point we're you know north of a
54:49
25-30 billion dollar company this was gonna
54:51
be a sub 2 billion dollar acquisition
54:54
and I think we felt that there
54:57
would be a lot of growth
54:59
potential both in terms of expanding
55:01
the unit based domestically and globally.
55:06
Look at it backwards now seven
55:08
years of ownership and
55:11
it's a great case in point to
55:13
illustrate that the system in play. So
55:15
you initially had a significant
55:18
gain in it but by
55:20
virtue of the backhand synergies Popeyes
55:22
was if you were the subscale
55:24
public company so there were a lot
55:27
of costs that could come out by virtue of being
55:29
part of restaurant brands international. Maybe
55:31
just to double click on that it's 18 times acquisition
55:34
buys down to about 12 times. Yeah. Rough
55:36
math. Just by virtue of doing that. Then
55:39
you fast forward to today on a company three
55:41
times as big in sales then what
55:43
we bought and again a function of fast
55:45
international and domestic expansion or restaurant
55:48
count and basically
55:50
launching a boneless
55:53
product which is chicken sandwich. The
55:56
restaurant counts up 70%, AUV is up 30%. You
56:00
mentioned that the franchise business at
56:03
the Original Burger King you learned was even better
56:05
than you thought. After
56:08
doing this now the third time, what
56:10
is it that makes it such a
56:12
special business? The franchise
56:14
business basically is a business
56:16
where you partner with
56:18
people, put
56:21
their own capital and their entrepreneurs. They're
56:23
excellent operators in their parts of the world.
56:26
They have the ability to identify real
56:28
estate, they have the ability to attract
56:30
and train good managers and
56:33
then you bring a brand that
56:35
has great awareness, great preference to
56:37
the table and that really
56:40
enables them to win in such a
56:42
way that from your standpoint your
56:44
P&L is mostly comprised
56:47
of royalties and franchise fees.
56:49
So it's very very capital efficient and
56:52
has a lot of room for you to naturally grow
56:55
as long as you don't lose the focus
56:57
that your business is to make sure that
56:59
this franchise is made money. That
57:01
is your business and at that point with yours, you have
57:05
to always keep line of
57:07
sight that that's the goal of the business. So
57:09
the other aspect of that is now doing this
57:11
the third time. It sounds like
57:13
it works beautifully but there's always bumps in
57:15
the road. So what were some of the
57:18
things you learned from going through it either
57:20
at Burger King or then at Tim Hortons
57:23
and now at Popeyes that you
57:25
got more efficient at over time. One
57:28
of the most important avenues for
57:30
us is making sure that we
57:33
buy one of these businesses
57:35
or when we own one
57:37
of these businesses that we
57:39
have great partners developing the
57:41
brand in their home markets
57:43
that they're well capitalized, great
57:45
local partners with incredibly strong
57:47
unity economics and
57:50
naturally you're not gonna have a hundred percent success or
57:52
you're gonna have bumps along the road and
57:55
I think with us it's always learning from
57:57
the mistakes that you make along the way with
57:59
certain partners. making sure you have
58:02
the right local partner
58:04
that's well capitalized with the
58:06
right operating capabilities, maybe in the early
58:08
days with certain brands, maybe we went
58:10
to a country too soon or too
58:12
quickly or we picked a partner who
58:14
had a lot on his or her
58:16
plate with other businesses or other brands
58:18
and I think any one
58:21
of those factors can play in, that's
58:23
when you don't grow as
58:25
quickly as you can. It sounds pretty simple
58:27
but just making sure that we
58:29
are delivering a great brand with
58:31
great unity economics to a partner
58:34
that is ready to
58:36
be successful in that market, that's
58:38
when the magic happens. In
58:40
the case of India for instance,
58:42
we didn't rush in, we jointly
58:45
developed a localized menu
58:47
with our partner like over the course
58:49
of a year before we open our
58:51
first restaurant so making sure you take
58:53
all the steps necessary both on the
58:55
company side and the franchisee side to
58:57
ensure success is probably one of the
58:59
most important things we can do. Once
59:02
you have Popeye's coming, this playbook now
59:04
is so obvious to just rinse and
59:06
repeat so where did
59:08
you step in after that? The
59:11
latest acquisition that we did was
59:13
a company called Firehouse Subs, this
59:15
is in the end of 2021
59:17
and so that's the
59:20
fourth leg. We think about that,
59:22
it's a large category, the subs
59:24
category and there are several smaller
59:27
brands, Firehouse being one of them
59:29
that are growing at really really
59:32
attractive rates of return. We have
59:34
an incredible product, the brand stands
59:36
for something that is incredibly
59:39
important in the communities in which it operates
59:41
in terms of giving back and
59:44
we see room to
59:46
grow this business domestically
59:48
and globally for decades. I
59:50
think we opened up the first international restaurant,
59:53
it was under our ownership in Switzerland and
59:55
we have ambitions to bring that all around
59:57
the world and there's an example of a
59:59
large sub company. that has quite a
1:00:01
big global presence and we think that there's
1:00:03
plenty of room to have many many more
1:00:05
firehouse subs. So if you look
1:00:07
at all of this today, what
1:00:09
are the quantitative metrics of
1:00:11
the number of stores or franchises
1:00:14
across the brands that are part
1:00:16
of RBI? We have 30,000
1:00:18
restaurants north of 40 billion in sales,
1:00:20
50 billion plus or minus
1:00:22
total enterprise value. The company recently had put
1:00:24
out that it hopes to go to 60
1:00:26
billion in the next five or so years.
1:00:29
We became a real big business. You're
1:00:32
14 years in, do
1:00:34
you start to think about an exit or is this something
1:00:36
you're planning to own for another 21 years? We love
1:00:39
the business. We I think at
1:00:41
the moment are so excited first of all with
1:00:44
the team that we have in place. We
1:00:46
have this combination of talent that grew up in the
1:00:49
business. We have had
1:00:51
the fortune of finally
1:00:53
because we had conversations with our
1:00:55
common friend Patrick Doyle for
1:00:58
quite some time. Patrick really hit it out of
1:01:00
the park in his tenure
1:01:03
at Domino's. It's a landmark in
1:01:05
this industry and we're so fortunate to
1:01:07
have him as our partner and the
1:01:09
combination of Patrick and
1:01:12
the young team that we have there that came up
1:01:14
through the business. I
1:01:16
think we feel very very good
1:01:18
about people first. We feel very
1:01:20
very good about the continuation of
1:01:22
the opportunity to open restaurants around
1:01:25
the world and to grow
1:01:27
same-store sales in all four brands
1:01:30
still. So as a
1:01:32
combination of those two things I think this
1:01:34
is as the company has publicly guided. They
1:01:37
can grow high single-digit same
1:01:39
system-wide sales for a long time
1:01:41
and the cash conversion of that
1:01:43
given the nature of the fully
1:01:45
franchised business is one in
1:01:47
which the company pays a lot of
1:01:49
dividends today by the way. We
1:01:52
received two-thirds of our notional equity check
1:01:54
a year. So it's
1:01:56
very cash-flowing and has a
1:01:58
great compounding line of sales. ahead
1:02:00
of us a great team so we're you
1:02:04
think about the competition for your
1:02:07
own capital between keeping it
1:02:09
in a business that doing nicely and you
1:02:11
see a lot of visibility compared
1:02:13
to the kind of inflection you've been
1:02:15
able to create in a new business.
1:02:18
We think that between the
1:02:20
liquidity that we have from this different
1:02:22
investments over the years we
1:02:25
do have the capital every
1:02:27
several years to try to start a new
1:02:29
one of these. We're very excited about Hunter
1:02:31
Douglas that we started two years ago in
1:02:33
partnership with the Sonnenberg family. We think we
1:02:35
can do both as
1:02:38
long as we don't get out of
1:02:40
the discipline that of only starting a
1:02:42
new thing every several years when
1:02:44
we have people and when we
1:02:46
have time to focus and so on. Yeah
1:02:49
how often do you get to be
1:02:51
a part of a great business led
1:02:53
by a great team of people who
1:02:55
you've worked with for a long
1:02:58
time and have developed trust and
1:03:00
respect for over their successful tenure
1:03:03
in the business. We
1:03:05
had Patrick and Josh and the folks
1:03:07
involved there and so we're excited about
1:03:09
the long-term outlook for the business. Alex
1:03:12
you mentioned just a tiny bit at
1:03:14
the beginning that you do have another
1:03:16
vehicle that you're looking at buying
1:03:19
another business. Where
1:03:21
are you in that process? I
1:03:24
don't know that we at the
1:03:26
moment have anything where we are
1:03:28
really really ready
1:03:30
to put a trigger on. I
1:03:33
mean we do have some pretty
1:03:35
interesting proprietary situations in which we
1:03:38
have been able to get
1:03:41
close and get engaged and
1:03:43
to work on although there's
1:03:45
nothing that's really
1:03:48
mature to trigger
1:03:50
on. How
1:03:53
do you think about what industries you'd
1:03:55
be interested in looking at? Maybe
1:03:57
a way to answer that is what industry
1:04:00
or would we not want to look at? We
1:04:03
want to own fundamentally
1:04:05
good but somewhat
1:04:08
reasonably easy to understand
1:04:11
business and so you could
1:04:13
think about what that knocks out and
1:04:16
ideally a business that has a good
1:04:19
moat, a long operating history that's
1:04:22
not likely to be disrupted
1:04:24
or disintermediated anytime remotely
1:04:26
soon and ideally businesses
1:04:28
that aren't overly cyclical so it's not like
1:04:30
we're working so hard to run the business
1:04:32
better we just get the cycle wrong and
1:04:35
place for too long and those are some
1:04:37
of the criteria that we look at and
1:04:40
maybe that's why we ended up
1:04:42
owning some of these consumer businesses
1:04:44
in the past because they fall
1:04:46
into that bucket of somewhat easy
1:04:49
to understand been around for a long
1:04:51
time most likely not gonna get disintermediated
1:04:53
or disrupted try not to
1:04:55
over complicate things on our end. Incidentally
1:04:58
that's one of the things that's
1:05:00
so great about this fully-fringed,
1:05:02
quick service restaurant businesses which is
1:05:04
they're really not cyclical at all. Meaning
1:05:08
on downturns people trade down
1:05:11
look at what happened to the Ibedal
1:05:13
McDonald's or Burger King or Domino's
1:05:15
or all these brands in the great
1:05:17
financial crisis and the answer
1:05:20
is not much in most cases it grow.
1:05:23
So they're very resilient in that way which
1:05:26
is a very positive trait of this kind
1:05:28
of business. What have been
1:05:30
your biggest lessons learned from this deal
1:05:32
over this 14-year run? For
1:05:35
me it was my first deal
1:05:37
it was my first time running
1:05:40
a company and I'll apologize in
1:05:42
advance for my lesson not seeming
1:05:44
overly insightful but frankly
1:05:46
it was just the importance of having
1:05:49
a great team which again as the
1:05:51
29-year-old who is doing the analysis on
1:05:54
the deal after we bought the business
1:05:56
and Alex came to me and
1:05:58
said we need to assemble the team. Just
1:06:00
understanding the overall importance on
1:06:02
having A++ people
1:06:05
involved in the organization who are fully
1:06:07
committed to making a world-class
1:06:09
success until you're part of
1:06:11
it, I fully appreciate
1:06:14
how important it was to have
1:06:17
an incredibly talented team running the
1:06:19
business. Everything that has
1:06:21
happened that has enabled us 28 times,
1:06:24
returning our notional capital in this time frame
1:06:26
and how much more we expect to achieve
1:06:28
with this business. So
1:06:30
much of it has to do also
1:06:32
with having entered a high quality, great
1:06:34
business. There is no
1:06:37
substitute for that. Particularly if you're
1:06:39
going to hold it for a long, long
1:06:41
multi-dacket period. It needs to be
1:06:43
a good business. I don't
1:06:45
know that we are one of these people
1:06:47
like Steve Jobs or someone that's really, really
1:06:49
smart and the genius that we'll be able
1:06:51
to convert are so-so or a bad business
1:06:54
into a great business. So
1:06:56
we need to find great businesses
1:06:59
and sometimes the greatness will be
1:07:01
obfuscated by everything that's going on short term
1:07:03
and the noise associated with these things going on
1:07:05
short term. The fact that the
1:07:08
business is a great business is
1:07:10
no small part of what happened here. What's
1:07:13
both your favorite aspect of doing deals
1:07:16
and investing? We're not a
1:07:18
conventional investment firm. My favorite aspect
1:07:20
really centers around the people. I
1:07:22
had this opportunity to go initially as CFO
1:07:25
and then became CEO and ran the company
1:07:28
both from the financial side and CEO side for
1:07:30
nearly a decade. My favorite part
1:07:32
of the whole process was getting
1:07:35
to recruit, develop,
1:07:39
train some incredibly
1:07:41
talented special people who are
1:07:44
now today running
1:07:46
the organization. It's
1:07:48
extremely fulfilling. The
1:07:50
people cycle from hire to
1:07:52
train to grow to lead
1:07:55
to Be able to be
1:07:57
part of this and part of someone else's success.
1:08:00
It's extremely for selling then so
1:08:02
for me that's been far and
1:08:04
away know close second the most
1:08:06
fun part of the job. For.
1:08:08
Me really is creating three G
1:08:10
capital was probably the most important.
1:08:13
Thing. I've been able to get involved
1:08:15
in in my career and I would
1:08:17
love this to perpetuate the from. And.
1:08:19
I Think Dead My cofounders a
1:08:22
have been a great inspiration that
1:08:24
way the whole lives and careers.
1:08:26
In giving people opportunity, allowing
1:08:29
them to. Chart. Their own
1:08:31
pass. Allowing them to
1:08:33
have the results and benefits in
1:08:35
the wealth creation associated with creating
1:08:38
their own path. And I
1:08:40
would love that to continue here, at which
1:08:42
he capital. For. I'd love to
1:08:44
ask you both a couple of fun
1:08:47
closing questions to what is your favorite
1:08:49
hobby or activity outside of work and
1:08:51
family? Alex My first. I.
1:08:53
Love Spear Phishing. Which.
1:08:56
Is some combination of fishing
1:08:58
and freediving. And.
1:09:01
Probably. Contrary to what
1:09:03
we do here. Is. Probably
1:09:06
the most efficient way of fishing
1:09:08
since. When. It's a lot
1:09:10
of fun! Nice
1:09:12
places, So. I spend a
1:09:14
lot of time doing that. Outside
1:09:16
of work and family exercise and
1:09:19
probably in order as most frequent
1:09:21
but least enjoy as I run,
1:09:23
play tennis and play basketball in
1:09:26
that frequency and it my enjoyment
1:09:28
is probably the inverse day. Know
1:09:30
what's one fact that you find
1:09:33
interesting that most people don't know
1:09:35
about you. I. Say.
1:09:38
I'm. Definitely more introverted, an
1:09:40
extrovert, which probably isn't so
1:09:42
common for former public company
1:09:44
Ceos. Alex. I. Recently
1:09:47
gone quite involved the for lunch would
1:09:49
be. His recent very few people
1:09:51
know about it or Foundation has only. Three.
1:09:54
Years. My. Wife's very involved
1:09:56
with maybe. We were lucky to recruit this
1:09:58
gentleman that was an M B A. They offered.
1:10:01
Went down to pursue. It's
1:10:03
basically education for young people
1:10:05
and mostly digital education meeting.
1:10:08
Programming. Computer Engineering all
1:10:10
the way from basic programming
1:10:13
to. College. To masters
1:10:15
to Phd programs, Have
1:10:17
about one hundred scholars now. It's small, But.
1:10:20
We have big dreams for it. And. Is a
1:10:22
lot of fun. A hopefully untied will become better
1:10:25
known. But. Your biggest pet
1:10:27
peeves. I'd say wanna things
1:10:29
it pry bothers me as if people aren't
1:10:31
working at a hundred and ten percent are
1:10:33
giving something they're off. We'd never really cared
1:10:36
if they the smartest t ball and will
1:10:38
always at least when it people were working
1:10:40
at one hundred percent and giving the project
1:10:42
their everything. In short of that that always
1:10:45
bothered me. Dinner which to people
1:10:47
have had the biggest impact on your
1:10:49
professional less. Book. Number
1:10:51
One Alex. He gave me
1:10:53
a shot at something way
1:10:56
way earlier then I probably
1:10:58
deserved. Certainly. At a
1:11:00
time maybe when others wouldn't give me
1:11:02
a shot. And then are three cofounders
1:11:04
as well. House. with
1:11:07
my tree cofounders. I
1:11:10
mean had a huge impact in my life as
1:11:12
well. Be found me in
1:11:14
his M B A program. Our alma
1:11:16
mater. And of big bets
1:11:18
on me this one of them tickly skate
1:11:20
to huge battle me on a railroad. Really
1:11:23
believed him. He didn't give a close personal
1:11:25
friend and. Marcel.
1:11:28
Charges be really touch huge past year
1:11:30
when it came to filter to cap
1:11:32
on when I'm forever grateful for know.
1:11:34
Alex? what's the best advice you ever
1:11:37
received? When.
1:11:39
You get into a new situation or a
1:11:41
new business. Try.
1:11:44
To find. Good.
1:11:46
Common sense things to do when.
1:11:49
Don't make. Sewage.
1:11:52
Business decisions about. Strategic.
1:11:56
Things. Before you take the
1:11:58
time to understand the business, Well,
1:12:01
I think to an extent we apply
1:12:03
that at Burger King and I think
1:12:05
it's something that really prevents big
1:12:08
mistakes and usually by
1:12:11
focusing on the common sense, things that
1:12:13
are opportunities to be harvested while you're
1:12:15
learning about the business. Someone
1:12:18
once told me, work really hard to put
1:12:20
yourself in a position to get lucky because
1:12:22
a little bit of luck involved in everything
1:12:24
but you up your odds, you have your
1:12:26
chances through your controllable lever of hard work.
1:12:29
Okay, guys, last one, what life lesson have
1:12:31
you learned that you wish you knew a
1:12:33
lot earlier in life? Daniel,
1:12:35
why don't you go ahead? Don't be
1:12:37
afraid to make a big bet on someone if
1:12:39
you really believe in that person. Even
1:12:42
if maybe that person isn't 100% ready
1:12:44
at the time, don't be afraid, make the bet. Alex?
1:12:47
Yeah, something that I've come to appreciate
1:12:50
at the stage of my career I'm
1:12:52
at now is to focus your
1:12:54
time on the things that make the most
1:12:56
difference. Because the amount of
1:12:58
noise in
1:13:00
your day-to-day, be it
1:13:02
on your personal life at times, be it
1:13:05
at your work is high. Alex,
1:13:08
Daniel, thanks so much for
1:13:10
sharing this incredible story about 3G and Burger
1:13:12
King. Thank you for having us. Thanks
1:13:14
for having us, Ted.
1:13:16
Thanks for listening to the show. To
1:13:18
learn more, hop on our website
1:13:21
at capitalallocators.com where you can join
1:13:23
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1:13:35
a good one, and see you next time.
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