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McDonald’s Aims to Flip China Results by Ceding Control
Citic and Carlyle set to own an 80% stake in the fast-food giant’s China operations
By WAYNE MA in Beijing and KANE WU in Hong Kong
Updated Jan. 9, 2017 3:38 a.m. ET
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McDonald’s Corp. was one of the first American brands to strike gold in China, becoming a symbol of China’s opening to the West. Now it is handing over the reins here to a Chinese state-owned enterprise, in a deal that would value the business at up to 2.08 billion dollars.
The Oak Brook, Ill., chain said Monday it is selling an 80% stake in its China operations to a group that includes Citic Ltd., its investment-management arm Citic Capital Holdings and U.S. private-equity giant Carlyle Group LP. The Citic companies will own a combined 52% stake, while Carlyle will own 28%.
The agreement is for 20 years and is expected to close this summer. The sale price will be up to 1.66 billion dollars for the majority stake, to be held by Citic and Carlyle, depending on a final valuation of the China assets.
The deal comes as McDonald’s, like other big restaurant chains, moves to a so-called asset-light structure—essentially keeping the brands but selling off the stores. The model allows companies to collect a portion of sales without the costs and liabilities that come with large workforces and extensive real-estate holdings.
McDonald’s had more than 2,400 stores in mainland China and more than 240 in Hong Kong at the end of 2016. About a third of the stores in China are already franchised. All of the company’s remaining stores would be franchised under the deal, with McDonald’s retaining a 20% stake in them.
People familiar with the matter said McDonald’s cut will be about 6% of sales, or double the 3% take that Louisville, Ky.-based competitor Yum Brands Inc. garners from its KFC and Pizza Hut brands in China. The royalty fees increase over time during the 20-year length of the agreement, the people said. A McDonald’s spokeswoman declined to comment on those terms.
The parties were in deal talks for about seven months, and one recent issue that arose was how McDonald’s would be able to collect its revenue in light of the Chinese government’s moves to limit capital outflows, people familiar with the matter said. Capital outflows exceeding 5 million dollars are now coming under government scrutiny.
McDonald’s Chief Executive Steve Easterbrook acknowledged that, going forward, getting cash out of China will be a “top-quality problem” but declined to go into more detail. Previously, McDonald’s reinvested most of its profit from China back into the country.
McDonald’s has long-term plans to franchise 95% of its stores and is looking to do a similar sale in South Korea, Mr. Easterbrook said in an interview. He said McDonald’s has no plans for a spin off in Russia, where it owns and operates about 600 stores.
Yum Brands also moved recently to lighten up its assets, spinning off its more than 5,000 KFCs and about 2,000 Pizza Hut’s to form a new company, Yum China Holdings Inc. Although McDonald’s is the world’s largest fast food company by revenue and the No. 1 brand in most major markets, Yum has more stores in China—a situation Citic Capital chairman and chief executive Yicheng Zhang wants to change.
“China is McDonald’s second largest market, but it is the No. 2 brand in terms of stores. That isn’t McDonald’s rightful place,” Mr. Zhang said.
McDonald’s said Monday that the new owners are committed to building 1,500 new restaurants in China and Hong Kong over the next five years. They plan to focus on China’s so-called third and fourth-tier cities beyond metropolises such as Shanghai, Beijing and Shenzhen.
The Golden Arches have struggled in recent years to lift sales in China, most recently because of consumer protests related to U.S. opposition to China’s territorial claims in the South China Sea, Mr. Easterbrook told analysts on a recent earnings call.
The China business has become intensely competitive and much more complex since the fast-food chain entered the country in the early 1990s, Mr. Easterbrook said in the interview. The sale of the China operations will accelerate plans for store expansion in the world’s second-largest economy and free McDonald’s from having to make those costly investments itself, he said.
“It’s going to be a commercially successful outcome for us,” Mr. Easterbrook said. “We won’t be putting capital into the market, but we will be part of the decision-making process.”
The sale puts McDonald’s China business in the hands of a sprawling state-owned conglomerate that boasts a suite of financial services from banking to insurance, iron-ore mines in Australia, one of China’s richest but most underachieving soccer clubs and the country’s top offshore-oil helicopter-service operator. Citic Ltd. owns China’s seventh-largest lender by assets, China Citic Bank, a leading investment bank Citic Securities Co., energy giant Citic Resources Holdings Ltd., and metals maker Citic Pacific Ltd.
The company doesn’t have experience running fast-food chains, Mr. Zhang acknowledged, but he said its strengths in retail banking and its partnerships with real-estate and Internet companies will bring valuable expertise to the operation. He added that the consortium would retain McDonald’s current management team in China.
Morgan Stanley advised McDonald’s on the sale. J.P. Morgan Chase & Co. advised the Citic-Carlyle consortium.
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