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Bill Ackman Comments on Justice Holdings/Burger King

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Holly LaFon
Jun 13, 2012
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From Pershing Square's first-quarter letter:

Justice Holdings (JUSH, Financial)/Burger King (BKC, Financial)

We participated as a Founder in Justice Holdings, Ltd. by investing approximately 30% of the $1.4 billion of capital raised by this London Stock Exchange listed cash shell. The Funds received one third of the Founder economics for sponsoring the transaction. While cash is usually a commodity, by raising cash in a publicly traded vehicle that could be used to take public a large private business, we believed that we could access a proprietary, high quality private transaction in an uncertain world in which there is a high degree of uncertainty in executing an IPO.

We had high standards for a potential Justice transaction. We sought to purchase a business that fits Pershing Square’s traditional criteria, namely, a simple, predictable, free-cash-flow generative company which has a long-term sustainable competitive advantage due to brand, unique assets, and/or market position, and earns high returns on invested capital. As important, the company had to be available at a fair price and be managed by owner-oriented, trustworthy, best-in-class management. I am pleased to say that the arrow of Justice found its target.

On April 3rd, Justice Holdings announced that it would merge with Burger King. When the transaction closes, Justice shareholders will own approximately 29% of the new company with the Pershing Square funds owning approximately 11% of the pro forma company. We expect the transaction to close shortly, Burger King Worldwide Holdings to begin trading on the New York Stock Exchange, and Justice Holdings to effectively cease to exist.

Burger King is the world’s second-largest fast food hamburger restaurant chain, with over12,500 restaurants in 80 countries. The Company has significant global awareness as a 58-year-old brand which has benefited from the billions spent on marketing to consumers around the world. On April 4th, we presented our detailed investment thesis on the company in a web presentation entitled “Justice Is Best Served Flame Broiled,” which we previously distributed to you.

Burger King’s U.S. business turnaround is being driven by a new menu, a new marketing strategy, an accelerated, lower-cost, store renovation program, and improved operations overseen by a larger and more effective store oversight team. International franchise growth is being achieved by refranchising company-owned units (selling company-owned stores to franchisees) and the formation of joint ventures with best-in-class local operators and private equity backers who commit to an aggressive schedule of store openings. The company has formed and launched joint ventures in Brazil and Russia, and anticipates completing joint ventures in China and other emerging markets. Burger King’s international restaurants compete much more effectively against McDonald’s than they do in the U.S. The company believes it can achieve similar scale to McDonald’s in many countries around the world. By next year, Burger King expects to have refranchised substantially all of its company-operated units around the world.

The public company will then become what we have called a Brand Royalty company, which when successfully executed, is one of the best business models in the world. After the refranchising is complete, the company’s revenues will be largely comprised of a franchise royalty stream from a rapidly growing portfolio of franchised restaurants. Because the company’s revenues will grow without the need for capital investment from the parent company, the substantial majority of the cash flows generated by the company over the long term can be returned to shareholders through share repurchases or dividends.

The company has made enormous progress with each of its strategic initiatives since the business was purchased by 3G, a private equity fund managed by the Brazilian investors best known for their controlling ownership of Anheuser Busch, a now much more profitable and better managed business under their leadership. Burger King’s free cash flow growth has nearly doubled over the last two years as the cost structure of the company has been rationalized, as company-operated stores have been sold, and as store operations have improved.

After years of negative same store sales, same store sales turned positive in December of last year, and were positive each month of the first quarter of 2012. While the company has not reported monthly same store sales in the second quarter, Carrols, the largest publicly traded Burger King franchisee has reported continued high single digit same stores sales in the second quarter. We believe this sales growth has been driven by increased consumer awareness of the new menu driven by the recently launched marketing campaign.

Once Burger King is public, 3G will retain 70% of the company and control the board of directors. While we were offered a seat on the board, we chose not to join, such is our confidence in the current management and ownership group. We join boards only when we believe we can add significant value to the company by becoming an insider.

Once the transaction closes, Burger King will become part of our passive portfolio. While we are generally averse to making active investments in controlled companies, we view 3G’scontrolling ownership of Burger King as a substantial positive for our investment because we think highly of management and 3G, agree with their business plan for the company, and because our interests are aligned by virtue of their 70% continued ownership.

As you may know from the public disclosure of the transaction, I am personally an investor in the 3G private equity fund that owns Burger King. To avoid the potential for any actual or perceived conflict of interest, just prior to the Justice merger, the 3G private equity fund will

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