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
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