McDonald’s Corp. (NYSE: MCD) agreed to sell a controlling stake in its China and Hong Kong operations to a group of investors for about $1.7 billion, a key component of the fast-food giant’s reorganization in a market where it’s striving to catch up with more nimble rivals.
Chinese state-backed conglomerate Citic Ltd., Citic Capital Holdings and U.S. private-equity firm Carlyle Group LP will acquire an 80 percent holding in a deal valuing the business at as much as $2.08 billion, according to a statement Monday. Oak Brook, Illinois-based McDonald’s will keep the remaining stake. The new owners plan to add more than 1,500 restaurants over the next five years in smaller Chinese cities.
M&A transactions for fast-casual restaurants have reached the billion-dollar-plus range. Recent deals include: coffee-and-doughnut shop chain Krispy Kreme Doughnuts Inc. (NYSE: KKD) agreeing to sell to JAB Beech Inc. for $1.35 billion; burger chain Wendys (Nasdaq: WEN) in Japan, backed by private equity firm Longreach Group, acquiring rival chain First Kitchen Limited from Suntory Holdings Limited; and Z Capital Partners LLC's deal to buy the Pink Taco restaurant brand, including one of the two Pink Taco restaurants and plans to develop more restaurants and a packaged food and beverage line. In Dec. 2015, General Atlantic made a minority growth investment in Barteca Holdings, owner of wine bar and casual dining chains with a combined 22 restaurants. For more on trends in restaurant deals, see Restaurateur Danny Meyer, of Union Square Café and Shake Shack Fame, Urges Dealmakers to Focus on Hospitality.
McDonald’s and rival Yum China Holdings Inc., which operates the KFC and Pizza Hut brands in the mainland, are among retailers that are trying to fend off domestic competition and attract middle-class Chinese consumers who increasingly demand high-quality and healthier dining options. As McDonald’s streamlines its sprawling global operations, the fast-food giant is also looking at further deals in markets such as South Korea, Japan and Southeast Asia.
Under the agreement, Citic Ltd. and Citic Capital Partners will jointly take a 52 percent stake, while Carlyle will hold 28 percent.
“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.”
Shares of McDonald’s rose 0.4 percent to $121.20 at 8 a.m. in early trading in New York. The stock gained 3 percent last year.
McDonald’s currently operates or franchises more than 2,400 outlets in mainland China. Its five-year target means about 300 stores will be added annually. That compares with 600 stores for Yum China Holdings, which was spun off late last year by Yum! Brands Inc., and 500 restaurants for Starbucks Corp., according to the companies.
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 Inc. 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 Co., according to a person with knowledge of the matter. The U.S. 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.
McDonald’s CEO Steve Easterbrook is pursuing a turnaround plan to revive the company as it faces the fourth consecutive year of traffic declines in the U.S., its largest market. The China deal combines McDonald’s with partners “who have an unmatched understanding of the local markets and bring enhanced capabilities and new partnerships,” the CEO said in the statement.
The new 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.
U.S. restaurant chains have seen their market lead in China challenged by a growing lineup 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. Since the spinoff from its U.S. parent, that company has a carte blanche opportunity to pursue growth, its Chief Executive Officer 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. (NYSE: JPM) advised the buyer consortium on the purchase. Citic CLSA Capital Markets Ltd. advised Citic on the deal, while Citic Securities Co. acted as the conglomerate’s financial adviser in China.
Additional reporting by Kamaron Leach, Mergers & Acquisitions