On Wednesday, Nov. 16, Restaurant Brands International Inc. (QSR, Financial) announced the appointment of a new executive chairman. In the press release, Restaurant Brands was highly optimistic about the appointment, claiming that newcomer Patrick Doyle is expected to accelerate growth at its quick service restaurant chains. Restaurant Brands' four big brands are Burger King, Tim Hortons, Popeyes Louisiana Kitchen and Firehouse Subs.
The company expects Doyle to grow shareholder value because of his accomplishments as the CEO of Domino’s Pizza (DPZ, Financial) between 2010 and 2018.
According to Restaurant Brands, “he [Doyle] delivered 29 consecutive quarters of same store sale increases, system-wide sales growth of $5.6B to $13B, an over 2x increase in home market franchisee profitability while creating approximately $11B of shareholder value and increasing the share price over 23x from nearly $12 in March 2010 to $271 in June 2018.”
So far, so good. However, the appointment has raised some eyebrows, since Doyle could receive stock and bonuses worth $370 million in five (or five and a half) years, according to an analysis in The Globe & Mail. He will receive this payout if he doubles the share price over that period. Is this a good deal for shareholders, or will it just be another drag on a company that has been spinning its wheels in recent years?
The Restaurant Brands situation
After two robust years in 2016 and 2017, Restaurant Brands’ earnings per share without non-recurring items essentially went flat:
Not surprisingly, the share price growth has also been anemic since around that time, though it has bucked the trend by having a positive 2022:
Zooming out to the longer-term, though, it hasn’t shared in the industry-wide or market-wide surge in share prices over the past three years:
That’s cost shareholders a lot, and so it was obviously time for a change at the top.
What if the share price doubles?
According to the release, these are the key terms of Doyle’s contract:
- Doyle buys 500,000 shares for about $30 million and agrees to hold them for five years (subject to certain conditions).
- He receives a one-time equity package of 2 million shares, granted at fair market value (shares closed at $63.75 on Nov. 16, which may or not be the base price).
- These shares vest in five years, with a 100% target performance. The company says that corresponds with a roughly 10% compound annual return over five years.
- In addition, he receives 500,000 restricted share units vesting ratably over five years.
- And as if that wasn’t enough, he gets 750,000 performance share units vesting in five and a half years.
To cash in, Doyle needs to double the share price. Assuming the base price is the one at closing on Nov. 16, which was $63.75, doubling that would take it to $127.50.
Multiplying that by the 305.9 million shares would amount to $39.002 billion. That, of course, should be double the current market cap of $20.42 billion. The difference is $1.84 billion, so the base price is likely a little less than $63.75.
If the share price doubles, shareholders will do very well, with an additional $18.58 billion accruing to the company. It might be an expensive contract, but there are certainly corporate and shareholder upsides.
Can Doyle do it?
Restaurant Brands' board of directors appears to believe in Doyle’s ability to double the stock price. But talent and know-how is only one part of the equation; will he be working with a feasible business model and will he have the corporate resources he needs?
Guru Bill Ackman (Trades, Portfolio) thinks the business model is very good. Writing in his Pershing Square semiannual 2022 letter (dated August 2022), he said, “QSR’s franchised business model is a high-quality, capital-light, growing annuity that generates high-margin brand royalty fees from its four leading brands: Burger King, Tim Hortons, Popeyes, and Firehouse Subs.”
After positively reviewing developments at these four brands, he added, “QSR’s franchised-based royalty model is particularly attractive in an inflationary environment. QSR’s revenues benefit when its franchisees increase prices, but its cost structure is not subject to the same inflationary pressures. QSR can continue to grow its business with minimal capital required as its franchisees open new units.”
Ackman concluded he believed Restaurant Brands is a “particularly attractive” investment in an inflationary environment. That’s because it benefits when its franchisees raise their prices, but its cost structure is not subject to the same inflationary pressures.
Second, he observed that the company had repurchased 3% of its shares outstanding over the previous 12 months. That, combined with a dividend yield of 4% at the time, amounted to a 7% return to shareholders.
Supposing that new executive chairman Doyle can hit his target of 10% compound annual growth, shareholders could end up with healthy double-digit returns.
At the end of September, Ackman held significantly more shares than any of the other eight gurus with holdings in the stock. He owned over 24 million shares, representing 7.91% of Restaurant Brands’ shares outstanding and 16.33% of Pershing Square’s assets under management.
That makes him a high-conviction activist investor in the stock. It's possible he may have had a say on hiring Doyle, though this is just speculation on my part.
Turning to corporate or financial resources, Doyle will inherit something of a mixed bag. The balance sheet shows, on a trailing 12-month basis, that the company holds $949 million in cash and cash equivalents. On the other hand, it had $86 million in short-term debt and $12.853 billion in long-term debt. Presumably, that debt has been driven by the company’s big acquisitions over the past eight years.
It had $1.450 billion in free cash flow in 2021. Roughly two-thirds of that amount was used to pay dividends; it allocated $974 million to dividend payments. That would leave roughly half a billion dollars for other purposes, including growth.
Restaurant Brands is profitable, and currently has a net margin of 15.13%, roughly half of its operating margin. At least Doyle won’t need to begin by plugging holes in the corporate ship.
Conclusion
Expect more criticism in the coming days of Doyle’s potential paycheck of $370 million, but if he can turn what’s been a sleepy underperformer into an overachiever, he could generate nearly $19 billion in additional value for the stock overall.
