As fast-food workers across the country strike for decent pay, Burger King is still preparing to abandon the U.S. as its home country. How does a burger company get flipped like this and who gets rich when it happens?
Burger King is a company whose products encourage obesity, heart disease and diabetes in its customers and pays its employees so little that they require food stamps and other government assistance just to be able to sustain themselves. Now Burger King is asking us to swallow something even unhealthier than their food and lower than their pay. They are asking us to let them off from paying many of the taxes that sustain the very infrastructure, courts, education system and food safety system that enables them to stay in business – even the trademark system that keeps others from using the name “Burger King” or calling their product a “Whopper®.”
The company has been stripped, financialized and any remaining value is ultimately being moved across the border. The story of what is happening with Burger King is the story of what American capitalism and its financial speculation has been and is doing to the American economy. It is being done to the company and to us by the financiers. In this case it is names like Goldman Sachs, TGP Capital, Bain Capital, 3G Capital – all playing games with Burger King, other companies the American economy and our lives. And the latest plunderer, Bill Ackman and his Pershing Square Capital Management, is a financial manipulator who when he sees a company’s carcass worth plundering, goes after it – even if it involves betting on a company’s stock going down and then working to drive the company into the ground.
Burger King Is Not Really A Fast-Food Company
Burger King is not really a fast-food restaurant company. In reality, it has been turned into a financialized company, receiving more than 80 percent of its revenue from franchise fees and property revenue.
In 2012, The New York Times’ Joe Nocera wrote about this flipping financialization of Burger King, in “Burger King, the Cash Cow”:
Burger King has long been an enrichment scheme for clever financiers, who have sucked hundreds of millions of dollars out of it over the years.
…Financial engineering has been part of the Burger King story for so long that it’s hard to believe there is still anything worth plucking from its carcass. “It’s been run as a cash cow for Wall Street,” said Bob Goldin, an executive vice president of Technomic, a food service consulting firm. Along the way it’s had 13 chief executives in 25 years, numerous strategy shifts and marketing campaigns — and has been constantly starved for cash. But, hey, the private equity guys got theirs. And isn’t that what really matters?
Nocera describes how the company changed hands and changed hands and changed hands – a London conglomerate, then a London liquor company – and then along came Goldman Sachs and private equity firms TGP Capital and Bain Capital.
Their $1.5 billion purchase price included only $210 million of their own money; the rest was borrowed. They immediately began taking out tens of millions of dollars in fees. Four years later, they took Burger King public. But, first, they rewarded themselves with a $448 million dividend. In all, according to The Wall Street Journal, “the firms received $511 million in dividend, fees, expense reimbursements and interest” — while still retaining a 76 percent stake.
Then they sold to yet another private equity firm, 3G Capital for $3.3 billion, of which Nocera said, “… the original private equity troika reaped a fortune by selling a company that was in nearly as much trouble as it had been when they first bought it. Surely this represents the apotheosis of financial engineering.”
“Going The Way Of A Lot Of American Corporations”
Former Secretary of Labor Robert Reich recently discussed the financialization of Burger King on “All In with Chris Hayes,” saying,
“Burger King is going the way of a lot of American corporations. They used to be businesses set up to do something, like provide hamburgers. It’s now a finance company. All American companies are becoming financial companies…It’s not that they are investing more money in jobs. In fact this finance company that owns burger king, their reputation is that they buy companies, slash payrolls, squeeze customers, squeeze as much profit as you possibly can get out of it and now their reputation is going to be you also go abroad to get lower taxes…The people who are the big winners obviously are these private equity types. They are treating Burger King as a poker chip.”
A “Poker Chip,” Not A Restaurant
Burger King is so much more a financial “play” – a poker chip to be flipped – than a company that actually makes and sells something, that its recent owners didn’t even try the food before buying the restaurant chain. To illustrate this “poker chips” nature of how Burger King is flipped, after 3G Capital bought them in 2010, one of 3G’s principals “ate his first Burger King hamburger only after acquiring the company and commented that he found it too big.” And the person 3G put in charge of Burger King?
“What’s important is not knowing hamburgers, it’s knowing how to lead a company,” says Paulo Veras, an Internet entrepreneur who for several years led one of the trio’s foundations. “It’s the kind of intelligence that transcends any specific business segment.”
3G laid off much of the staff at BK’s headquarters in Miami and cut expenses but did nothing to increase BK’s business. They “refranchised” by selling off almost all of its company-owned outlets, and increased the number of franchises to about 14,000 (partly to shed the costs of being responsible for employees – see “The NLRB’s McDonald’s Ruling Is A Big Win For Low-Wage Workers”).
As part of its financialization, the company has already been structured to avoid taxes, including using non-U.S. transactions to push income around. In “Burger King has maneuvered to cut U.S. tax bill for years,” Reuters reports, “Burger King generated almost 60 percent of its revenues in the United States between 2011 and 2013, regulatory filings show, but the chain reported just 20 percent of its profits in the country over the period. [. . .] Burger King’s low reported U.S. profit translates to domestic profit margins of just an average 4 percent between 2011-2013 – a fifth of the level it recorded in overseas markets in that time.”
The company now owns only 52 restaurants. According to the Reuters report, the company owns these “in the Miami area near the company’s current headquarters so it can test new food offerings and other changes to the way it operates.”
Bill Ackman and Pershing Square Capital Management
You might have heard that Warren Buffett has a stake in financing the Burger King inversion. But there’s another player involved in the Burger King story, a hedge fund named Pershing Square Capital Management, run by Bill Ackman. As Joe Nocera explained in the article cited above, “Burger King, the Cash Cow,” the financial shenanigans began in earnest. He wrote, “Three financiers, including William Ackman, the well-known shareholder activist, put together a special purpose acquisition company, or SPAC — a vehicle that allows them to raise money, buy a company and take it public without the hassle of an I.P.O. The SPAC then bought a stake in Burger King, though 3G is still in charge.”
Bill Ackman is what they call an “activist investor.” Nathan Vardi at Forbes explains what this means, in “Bill Ackman Sues America“:
In the last year or so, hedge fund billionaire William Ackman has tried to destroy a company that sells diet shakes, played a prominent role in nearly driving a 112-year-old retailer into the ground, helped launch a hostile takeover of a pharmaceutical company in a way that the Securities and Exchange Commission is reportedly examining for potential violation of insider trading law, accused George Soros’ family office of insider trading, and fought and made up with Carl Icahn. Now, Ackman is suing the U.S. government.
Ackman’s suit against the U.S. government involves the purchase of about half a billion dollars of common stock in Fannie Mae and Freddie Mac. Even though these shares have risen approximately 50 percent, Pershing is suing the government, claiming profits from the companies should go to shareholders instead of to repay the government for providing $188 billion to bail the companies out in 2008.
Ackman’s targets have included companies like Botox-maker Allergan, which accuses his firm of violating complicated insider trading laws by buying up shares while knowing that another company, Valeant, would launch a hostile takeover of its own. Another Ackman target was JC Penney, with Ackman’s Pershing Capital buying a major stake in the retailer and implementing a strategy that failed terribly, eventually costing 19,000 employees their jobs.
Ackman is also accused of “shorting” Herbalife stock, placing a huge bet that the stock would go down and then launching a PR blitz claiming the company is a pyramid scheme that many claim was done in order to knock down the price of its stock. (Ackman’s Pershing Square will make $400 million if they can drive the price of Herbalife stock down $20 by January 15, 2015.) The New York Times reported, “Yet Mr. Ackman’s staff acknowledges that this crusade is really rooted in one goal: finding a way to undermine public confidence in Herbalife so that his $1 billion bet will produce an equally enormous return.”
Nathan Vardi writes at Forbes of Ackman’s wrath against the legal efforts of companies he goes after, in Hedge Fund Billionaire Bill Ackman Bashes Lawyers, “…activist hedge fund billionaire William Ackman has focused most of his attacks on Herbalife, the seller of diet shakes that Ackman says is “a criminal enterprise” run by “a predator” CEO, Michael Johnson…Ackman…is criticizing the lawyers who are hired by the corporations that Ackman and his fellow band of activist investors launch campaigns against—Wall Street lawyers who make their living defending companies from Ackman.” This is in response to an attorney complaining to the Securities and Exchange Commission (SEC) that activist investors like Ackman “are short-term investors who force companies to sacrifice long-term gain in order to engineer an immediate investment return for themselves.”
In 2012 Ackman saw an opportunity to give Burger King one more fleecing, and that’s when the company’s real financial shenanigans began. While flying by he saw a carcass that hadn’t been completely picked yet. Ackman engineered a “reverse merger” with a “special purpose acquisition company (SPAC)” called Justice Holdings. Justice Holdings existed only to acquire companies, making them public. Before acquiring Burger King the company was listed on the London stock exchange. But with the merger it cancelled that listing and re-listed on the New York Stock Exchange under the name “Burger King.”
Picking on the remains of Burger King has been very good to Ackman. Bloomberg BusinessWeek described how good, in “Ackman’s Pershing Square Makes $203 Million on Burger King.” On the day the inversion takeover of Tim Horton’s was announced Perhing’s stake in Burger King gains about $203 million.
But Ackman and others aren’t paying big taxes on this deal. Normally an inversion is considered a taxable event by the IRS. The shares are changing hands, and the shareholders are subjected to a tax on their gains – often without receiving cash to cover the resulting taxes. Robert Wood explains at Forbes that most inversions are taxable events, but this one let’s shareholders choose to receive “units” in a new Canadian partnership or regular common stock in the combined company. Choosing the partnership lets them defer taxes until later. However, as Wood goes on the explain, in this deal there are only so many “partnership units” and the big guys – 3G Capital and Bill Ackman – will probably snap them up, leaving other Burger King shareholders with a big tax bill.
Bloomberg elaborates, in “Burger King Backers to Avoid U.S. Anti-Inversion Penalty“:
The group of investors who control Burger King Worldwide Inc. (BKW) are using an unusual strategy to avoid the tax penalty that normally applies to shareholders of companies that shift their legal address out of the U.S….Rather than take shares in the new combined Canadian company, 3G Capital, an investment fund with offices in New York and Rio de Janeiro, will swap its majority stake in Burger King for interests in a related Canadian partnership that can be converted into stock, the companies said in a statement today.
Do State Pension Funds Believe in Burger King Inversion?
One source of the big money that drives hedge funds like Pershing Capital is public pension funds. These funds are taking on the extra risk that goes with looking for higher earnings. Hedge funds and private equity promise enormous returns as they harvest companies and strip what’s left of the carcass of the American economy.
Corporations like Burger King are leaving the country to dodge their taxes. But it is taxes that provide the wages of the public employees who fund and rely on public pension funds. So what do these pension funds have to say about this?
Public pension funds in New Jersey, Arkansas, Massachusetts, and maybe other states, are involved in Ackman’s Pershing Square Burger King financial game.
- New Jersey: “Pershing Square now manages $14.7 billion, up from $11.2 billion a year ago, for wealthy clients and pension funds, including New Jersey’s state retirement fund and the Arkansas Teacher Retirement System.”
- Arkansas: ”When you are with the best of the best, there is no being excited about these numbers,” George Hopkins, executive director at Arkansas Teacher Retirement System, said of the returns. “It just confirms what you already knew. Brilliant people will make you money over time.”
- Possibly Massachusetts: “New York-based Arden has won the $5.2 billion mandate to provide hedge fund advisory services for the $58 billion pension fund, which already invests with prominent funds like William Ackman’s Pershing Square Capital Management, Dan Och’s Och-Ziff Capital Management.”
What are public pension funds doing putting money into these hedge finds that are engaging in such economically destructive activities? Not only are there terrible human and societal costs, but what about the risk? The reason there is a higher return is that there is a higher risk, and in some cases the risks are much higher.
Hedge funds are thought to be high-return instruments for the wealthy and financially savvy, but this is because of the occasional high-return play that makes the news. However, in “Hedge Funds Are for Suckers,” Bloomberg explains why hedge funds are often just high-fee, low-performance investments. As BusinessWeek explains in “Public Pensions Cannot Stop Chasing Performance,” “The average hedge fund return for public pensions was 3.6 percent for the three years ended March 31, a period when returns from stocks were up more than 10 percent.” Unfortunately, “…for all the griping about hedge funds’ high costs and lousy performance, it doesn’t appear pension funds have learned their lesson: They are maintaining their investment in private equity, in some cases, even expanding it.”
So far the pension funds are remaining silent on the issue. In the NY Times’ Dealbook, “Public Pension Funds Stay Mum on Corporate Expats,”
Many of the nation’s largest public pension funds — managing trillions of dollars on behalf of police and fire departments, teachers and others — have major stakes in American companies that are seeking to renounce their corporate citizenship in order to lower their tax bill.
As Burger King Goes…
The original reason We the People enabled, through our laws, these things called “corporations” was for our benefit. Why else would We the People have done this? We provided the roads, schools, courts and the rest of the physical and social infrastructure that enable a company like Burger King to prosper. But we let private capital instead of We the People pocket the return on the investment in the companies that infrastructure enables. The deal was supposed to be that in exchange We the People would receive good products and services with good warranties and good customer service. We would receive good jobs with good benefits. And we would receive a share of that return through taxes in order to invest forward in that infrastructure to keep the virtuous circle going. But that deal has been broken.
Burger King is only one more example of the destructive way that American capitalism has morphed into a destructive machine. The company has repeatedly been, as Mitt Romney so eloquently put it, “harvested” to squeeze value out. The company’s already-low-wage (and therefore taxpayer subsidized) employees are shed and accounting schemes are invented to rig the books to make it look like the distant owners bear few responsibilities. Eventually new private equity and hedge fund companies sense a bit more meat on the carcass and the company again trades hands as new owners swoop down to pick at it. The product, customers and country matter not a whit – one buyer only tasted the restaurant chain’s product after buying the company, and didn’t even like it.
Finally, in the end, the enterprise is moved outside of our borders in a scheme to dodge our efforts to collect even the smallest share of what is due us. Just like what is happening to the rest of our economy.
Editor’s Note: This essay originally appeared on September 24, 2014, on Seeing the Forest, a website featuring commentary by Dave Johnson, frequent public speaker and talk-radio guest and a leading participant in the progressive blogging community. It was reproduced here with the consent of Mr. Johnson.