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Burger King Divests German Stake

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As a part of its global refranchising initiative, Burger King Worldwide recently divested its wholly-owned subsidiary, Burger King GmbH and its 91 restaurants in Germany to Burger King franchisee Yi-Ko Holding GmbH – an entity owned by Ergün Yildiz and Alexander Kolobov. The financial terms of the deal were not disclosed.

Following the transaction, Yi-Ko Holding GmbH is now the biggest Burger King franchisee in Germany. The franchisee will boost the brand’s presence in Germany over the next five years. Moreover, it will renovate an additional 57 restaurants during the next 18 months.

Previously, one of the partners of Yi-Ko Holding GmbH – Alexander Kolobov –successfully enhanced the brand’s presence across Russia. Its other partner – Ergün Yildiz – shares a decade-long relationship with the brand. Awareness of local food habits and expertise in operating restaurants make Yi-Ko Holding GmbH a strategic choice for Burger King’s expansion story in Germany.

As per Euromonitor, positive economic performance and a hectic lifestyle helped drive consumer foodservice industry, especially fast food, in Germany. It is the biggest market of Burger King outside the U.S. and still presents ample room for growth. Also, per Euromonitor, both international and domestic restaurant chains will become more popular. We believe that Burger King seeks to capitalize on this opportunity.

In order to attain a 100% franchised model, Burger King remains focused on the strategy of re-franchising its company-owned units. We believe re-franchising a large chunk of its system will provide another opportunity for margin expansion. Also, the company’s efforts to reduce its capital requirements will ensure steady free cash flow generation. Presently, nearly 97% of its restaurants are owned and operated by independent franchisees. Management expects to have 100% of its system franchised by 2013.

However, the market is not free from competition. Burger King will likely face intense competition in the region from its peers McDonald’s Inc. (MCD - Free Report) and Yum! Brands Inc. (YUM - Free Report) . McDonald’s is a prominent name in Germany.

However, owning to the ongoing debt-crisis in Eurozone, German consumers have become more value-sensitive these days as evident from the performance of McDonald’s. Hence, Burger King might have to depend on a value menu to trigger sales in the region at the current level.

Burger King currently carries a Zacks Rank #2 (Buy). Another restaurant company worth a look at the current level is Wendy’s Co. (WEN - Free Report) carrying a Zacks Rank #1 (Strong Buy).

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