McDonald's sells China stake for $2bn

A Big Mac hamburger and french fries. PICTURE: Ben Stansall / AFP

A Big Mac hamburger and french fries. PICTURE: Ben Stansall / AFP

Published Jan 9, 2017

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Hong Kong - McDonald’s

agreed to sell a controlling stake in its China and Hong Kong operations to a

group of financial investors in the latest effort by the world’s largest

fast-food chain to catch up with Western rivals by opening new stores in

smaller Chinese cities.

A consortium including Citic

and  Carlyle Group will buy an 80 percent stake in a deal valuing the

business at as much as $2.08 billion, according to a group statement

Monday. McDonald’s will retain a one-fifth share in the business, with the

partnership planning to add more than 1 500 restaurants over the next five

years in China’s lower-tier cities.

Oak Brook, Illinois-based

McDonald’s and rival Yum China Holdings Inc., which owns the KFC and Pizza Hut

brands in the mainland, are combating rising domestic competition as they fight

to retain middle-class Chinese consumers who increasingly demand high-quality

and healthier dining options. The fast-food giant is also looking at further

deals in markets such as South Korea, Japan and Southeast Asia as it

streamlines its sprawling global operations.

“Citic and Carlyle’s

resources will allow McDonald’s to expand rapidly and refurbish old

restaurants, which is expensive to do,” said Ben Cavender, a Shanghai-based

analyst at China Market Research Group. “Given that McDonald’s lags behind KFC

in terms of store count in China, we can expect them to expand aggressively and

invest heavily.”

Read also:  Ramaphosa sells off stake in Shanduka

Yum China Holdings and

Starbucks plan to add about double the number of stores - as many as 3 000 in

China - over the same period.

‘Cash machines’

Under the deal, Chinese

state-backed conglomerate Citic and Citic Capital Partners will jointly take a

52 percent stake, while Carlyle will hold 28 percent.

While Citic and Carlyle are

paying a “substantial price,” for 20-year franchise rights, the food and

beverage chains are “cash machines,” Cavender said. In contrast, Yum China

licensed the KFC and Pizza Hut brands from Yum! Brands for 50 years, with automatic

renewals that could make it possibly indefinite.

The McDonald’s transaction

is Carlyle’s second-biggest deal in China, trailing only its investments in

China Pacific Insurance Group, according to a person with knowledge of the

matter. The US private equity firm invested a total of more than $700 million

in China Pacific Insurance in 2005 and 2007, the person said, asking not to be

identified because the information is private. A spokeswoman for Carlyle

declined to comment.

The deal combines McDonald’s

with partners “who have an unmatched understanding of the local markets and

bring enhanced capabilities and new partnerships,” CEO Steve Easterbrook

said in the group statement. The McDonald’s CEO is pursuing a turnaround plan

to revive the company as it faces the fourth straight year of traffic declines

in the US, its largest market.

Read more: the challenges

facing McDonald’s in China

As a result of the

transaction, McDonald’s is re-franchising more than 1 750 company-owned stores

in China and Hong Kong, according to the statement. The partnership will also

focus on areas such as menu innovation, retail digital leadership and delivery,

the statement said.

McDonald’s, which said in

March it’s seeking strategic partners in Asia, has committed to re-franchising

4 000 restaurants by the end of 2018, and has set a long-term target to have 95

percent of its outlets owned by franchisees.

US restaurant chains have

seen their market lead in China challenged by a growing line-up of Asian

competitors such as Ting Hsin International Group’s Dicos eateries. The seller

of Big Macs is also playing catch-up to Yum China, which spun off from its US

parent Yum! Brands Inc November 1 and has a carte blanche opportunity to pursue

growth and add 600 restaurants a year in the country, CEO Micky Pant has said.

The months-long auction

process drew interest from international private equity funds and local

companies. In October, people with knowledge of the matter said TPG Capital had

exited the race, leaving its erstwhile partner, Chinese grocery operator Wumart

Stores Inc., to compete against Carlyle and Citic. Bain Capital had also teamed

up with Chinese hotelier GreenTree Hospitality for a bid, the people said at

the time.

JPMorgan Chase & Co

advised the buyer consortium on the purchase, according to Monday’s exchange

filing. Citic CLSA Capital Markets advised Citic on the deal, while Citic

Securities acted as the conglomerate’s financial adviser in China, the filing

shows.

BLOOMBERG

 

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