Diageo's Burger King sale off the menu

Fast food: Drinks giant mulls other options as talks to sell fast food chain to Texas Pacific grind to a halt

Diageo admitted yesterday that it was back to square one with the sale of Burger King after a $2.26bn (£1.43bn) deal struck in July to sell the fast food chain fell apart.

The drinks giant warned that any new deal with Texas Pacific Group, the US venture-capitalist leading the acquisition, would be "materially different" to the original agreement. The latest twist in a saga that has stretched on for more than two years came nearly a fortnight after Diageo first revealed that the sale had run into trouble. The news sent shares in Diageo down 4 per cent to 684p.

Diageo, which inherited Burger King from Grand Metropolitan in the 1997 merger with Guinness, said it was "continuing discussions with Texas Pacific, while considering other options". For the moment, an exclusivity agreement with the US buying consortium prevents Diageo from talking to other buyers. But a group spokeswoman said: "If the deal falls through then we would have a contingency plan in place." She declined to elaborate further.

Diageo is thought to be reluctant to take an equity stake in the buying consortium as part of a renegotiated deal, analysts said.

Industry sources said Texas Pacific, and its partners Bain Capital and Goldman Sachs Capital Partners, had reduced their offer to $1.5bn. The deal has been dogged by reports that bankers at the buying consortium, JP Morgan Chase and Salomon Smith Barney, have struggled to raise the necessary debt funding.

Mark Puleikis, a drinks analyst at Merrill Lynch, said: "At this stage there is little visibility on the timing or the likely changes to terms and price but clearly the change could be more than the $200m change that we originally thought." He added that "each $500m reduction in the sale price" would wipe 0.6 per cent off his earnings per share estimates.

The original agreement, which followed a pick-up in trading at Burger King fuelled by a range of new products such as a chicken Whopper and a new veggie burger, was dependent on the chain meeting certain performance targets until the deal closed.

Diageo said yesterday: "Texas Pacific and its partners expressed a desire to continue in discussions towards a transaction materially different as to terms and structure."

The delay to the sale, which Diageo had hoped to complete by the end of December, illustrates the problematic trading conditions in the fast food market. Analysts believe the industry has never fully recovered from the public's reluctance to eat hamburgers in the wake of mad cow disease. A trend towards healthier living and the prospect of multimillion pound lawsuits over the addictive quality of junk food has also hit industry sales.

Diageo, whose drinks portfolio includes Smirnoff vodka and Johnnie Walker whisky, said in October that trading in the industry had "deteriorated" over the past three months after McDonald's had resorted to aggressive price discounting to halt sliding sales. Last week, McDonald's, which has a significant stake in the Pret a Manger sandwich chain, said it would miss its 2002 earnings estimates as it announced plans to close 175 outlets and pull out of certain countries. Wendy's, the industry number three to McDonald's and Burger King, has also cut its earnings target.

Other bidders for Burger King were thought to include Thomas H Lee, the US buyout company, and Triarc, which owns the Arby's fast-food chain.

The sale of Burger King is part of Diageo's strategy to focus on drinks brands. It still owns a 22 per cent stake in General Mills, which it acquired last year as part of its own sale of Pillsbury to the US food group.