Diageo guarantees $850m loan to secure Burger King sale

The drinks giant Diageo finally completed the protracted sale of Burger King yesterday, but the company had to agree to guarantee a loan of $850m (£535m) to have the fast-food chain taken off its hands, even at a knockdown price of $1.5bn.

The group of American investors, led by Texas Pacific Group, yesterday agreed terms with Diageo for Burger King, after first discussing a $2.2bn deal in July. The bid talks foundered after a severe fall-off in trading at Burger King that made negotiating a price and securing funding for the deal increasingly difficult.

In order to get the deal to completion, Diageo had to step in as guarantor for a loan of $750m by two banks to the buyers of Burger King and $100m in a revolving credit facility.

Nick Rose, finance director of the group, said he was forced into providing the guarantee on the deal because investment banks, feeling the effects of continued economic uncertainty, were reluctant to give their backing to such large corporate financing deals.

As part of the $1.5bn deal, Diageo is receiving $1.2bn in cash and the remainder is being financed by loans. It is handing over $212m of subordinated debt to Burger King, which will be accounted for on Diageo's books as a loan note.

In order to encourage early repayment of the loans, which have a five-year term, Diageo has offered a $10m sweetener for Burger King's new owners to repay the debt within 18 months. Mr Rose said Burger King had an annual cash flow of around $200m that would allow it to make the interest repayments on the loan with ease.

Analysts were relieved to see the deal come to fruition, despite the reduced price and loan exposure. "They have had to make some concessions, but the over-riding thing is that they have at least now got rid of it," said Nigel Popham at Teather & Greenwood. "In the context of the Diageo group, it is not that relevant. Hopefully they can now put the whole thing behind them."

Shares in Diageo went up 4.28 per cent on the news, closing at 695p.

But there are concerns that Burger King could run into further trading difficulties which could hamper its ability to make good its debts.

Burger King is suffering from a price war in the fast food chain market. Diageo yesterday revealed that Burger King's operating profit in the six months to the end of December would be down 20 per cent on the previous year. It has had to follow price cuts made by its rival, McDonald's, in lowering the price of its best-selling burger, the Whopper, to under a dollar. Diageo has already written off $1.1bn of goodwill in Burger King this year, and more write-downs may follow.

The original deal with the Texas-led group, which includes Goldman Sachs, would have left Diageo with a $175m tax bill. Yesterday's agreement gives it a $100m tax credit.

The proceeds of the sale will be used to reduce the debts on Diageo's balance sheet.

Diageo is also now free from liabilities arising from litigation currently plaguing the sector by overweight customers claiming they were not aware of the health risks of eating junk food.

The company, which has among its brands Guinness, Smirnoff and Baileys, announced in 2000 that it wanted to dispose of its fast-food chain to become a purely drinks business.

"It is easy to forget Burger King is only 5 per cent of our group," said Mr Rose. "It has had a disproportionate share of our attention.

"We can now start next year knowing our shareholders will get better returns," he added.