BKR of 'Burger King and Tim Hortons', Soaring Debt Ratio... Affinity Faces Tough Exit

It has been 10 years since private equity fund (PEF) manager Affinity Equity Partners acquired management control of BKR, but analysts say an exit (investment recovery) will not be easy. This is because BKR's debt has been snowballing.

According to the investment banking (IB) industry on August 12, BKR, which operates Burger King and Tim Hortons, has seen its debt ratio soar into the 400% range, raising red flags about its financial soundness. As of the end of last year, total liabilities stood at 436.6 billion won and total equity at 106.4 billion won, resulting in a debt ratio of 410.3%. This figure is up by 146.9 percentage points compared to the previous year.

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BKR recorded its highest-ever performance last year, but the high debt ratio overshadowed these results. Last year's sales reached 792.7 billion won, up 6.4% from the previous year. Operating profit surged by 60.4% to 38.4 billion won. The operating margin was 4.8%, the highest since 2014.

BKR's debt has increased sharply since Affinity acquired the company in 2016. Debt, which was only 69 billion won in 2016, grew to 310.9 billion won in 2019, and then to 436.6 billion won last year. This mounting debt has led to significant interest expenses. Last year, BKR spent 20.1 billion won on interest payments, meaning more than half of its operating profit was used to pay off debt.

As debt increased, BKR's equity shrank, causing the debt ratio to rise steeply. Last year, BKR reduced its capital by retiring 151,000 shares through a paid-in capital reduction. As a result, the total number of shares issued decreased from 409,000 to 258,000, resulting in a capital reduction loss of 39.3 billion won. The debt ratio is calculated by dividing debt by equity, so the decrease in equity due to the paid-in capital reduction led to a higher debt ratio.

It is believed that Affinity's move to recover its investment has further increased BKR's financial burden. Typically, private equity funds have a maturity of 10 years for the funds used to acquire companies. Within this period, they must recover their investment and return it to their limited partners (LPs). Affinity attempted an exit in 2021 but failed, and subsequently sought to recover its investment indirectly through a paid-in capital reduction.

This is likely to become an obstacle to Affinity's exit. While BKR could be considered an attractive asset if it consistently demonstrates strong cash generation despite its high debt ratio, the broader food and beverage (F&B) market has recently been facing difficulties, which is a concern.

Tim Hortons, known as "Canada's national coffee," closed its directly operated Cheongna store in Incheon this past June. This was the first closure of a directly operated store since Tim Hortons entered the Korean market by opening the Sinnonhyeon Station location in December 2023. On April 1, Tim Hortons officially announced its entry into the franchise business. This appears to be an effort to expand its scale and enhance cash generation. However, no official franchise locations have opened in the approximately four months since the announcement.

An IB industry official said, "Currently, there are several F&B assets on the market, but M&A is difficult due to internal and external factors. Affinity also seems unlikely to achieve an easy exit. The priority appears to be securing financial soundness by reducing interest expenses through refinancing existing debt under better terms."

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