Jorge Paulo Lemann may not be a name that many Americans know, but Americans are certainly familiar with the products his companies make: the Whopper, Heinz Ketchup, and Budweiser beer.
As Brazil's richest man, Lemann has a reputation as a shrewd deal-maker who values cash flow above all else. Lemann's private equity firm -- 3G Capital -- recently partnered with Warren Buffett to acquire Heinz (UNKNOWN:HNZ.DL) in a $23 billion deal. His numerous successes have enriched him and his fellow shareholders -- which makes a partnership with Lemann an enticing opportunity.
Although it is far from certain what Lemann will do next, one of his old partners believes that he has identified a company that fits Lemann's criteria and may be the target of his next leveraged buyout. Even if the Brazilian billionaire does not move to make the acquisition, investors would be well served to own this great company.
The biggest reason to believe in Lemann's investment acumen comes from his recent success in turning around Burger King Worldwide (NYSE:BKW). 3G Capital bought the struggling fast food chain in 2010 for $3.3 billion -- less than half of what it trades for today.
Unlike Warren Buffett, Lemann often replaces the executives at acquired companies with his own team; Burger King was no exception. The new team changed the company's business model to focus on franchises rather than company-owned restaurants. This freed up capital, enabling the company to expand rapidly while it reduced its headcount. As a result, Burger King's operating margin increased from 15.5% in fiscal 2011 to 47.9% in its most recent quarter.
Burger King's enterprise value is now almost three times the price that Lemann paid for the company in 2010 -- and it may still be undervalued. The company reported a 19% return on equity in its most recent quarter, up from 8.4% in 2011. As the company transitions to a fully franchised model, the vast majority of the company's cash flow can be returned to shareholders. At the same time, the company can continue expanding into new markets with hardly any capital investment. This is a model for long-term value creation.
Before Lemann even had the idea to turn around Burger King, he had already improved the operations of America's largest brewer: Budweiser (NYSE:BUD). 3G Capital became the company's largest shareholder via its 2008 merger with InBev. The merger gives shareholders of the combined company heavy exposure to the faster-growing Latin American market, while expanding the company's distribution capabilities.
Like he did with Burger King, Lemann inserted his own management team to institute strict cost controls and a new budgeting process. The company has since cut all but the absolutely necessary expenses; consumers have even complained that the company watered down its beer to save money.
Although (even more) watered-down beer is bad news if you are a loyal Budweiser drinker, shareholders should praise these tactics; the company's operating margin rose from 23% in 2008 to 32% in 2012. This occurred even as the U.S. beer market faced headwinds due to lower consumer spending and the emergence of craft beer. As long as Lemann remains a major shareholder, investors should expect improvements to continue.
What will Lemann buy next?
Although it is foolish to buy a stock simply to speculate on a buyout offer, buying a business that has the qualities that Lemann likes may be a good move -- even if he does not join you in your ownership.
A recent Businessweek article quoted one of Lemann's longtime business partners as saying that PepsiCo (NYSE:PEP) could well be the investor's next big target. Although the source did not provide any explanation for his pick, PepsiCo has several obvious qualities that make it a possible Lemann target.
Like Heinz, Burger King, and Budweiser, PepsiCo relies on the strength of its brands to provide a wide moat. In addition to having the second-largest share of the global carbonated soft drink market, PepsiCo owns the world's largest salty snacks business.
In addition, the company could benefit from a small shake up. Although there is little room for additional margin improvement, PepsiCo could unlock value by spinning off its beverage unit. Instead of owning a business that will always be second place behind Coca-Cola (NYSE:KO), the company could become a pure-play snacks company -- and number one in the world in its industry. If such an event were to occur, the market would likely rate the stock with a higher multiple to reflect the company's improved overall outlook.
Investors should not speculate on a leveraged buyout of PepsiCo, but they would do well to invest like Lemann -- in strong brand names that have the potential to unlock significant shareholder value in a short amount of time. Regardless of what Lemann decides to do, PepsiCo represents the kind of investment that made him one of the world's richest men.
Ted Cooper has no position in any stocks mentioned. The Motley Fool recommends Burger King Worldwide, Coca-Cola, and PepsiCo. The Motley Fool owns shares of PepsiCo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.