McDonald’s Corp. 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 Ltd. and Carlyle Group LP 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.”
Yum China Holdings and Starbucks Corp. 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 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.
The deal combines McDonald’s with partners “who have an unmatched understanding of the local markets and bring enhanced capabilities and new partnerships,” Chief Executive Officer 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 U.S., its largest market.
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.
U.S. 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 U.S. parent Yum! Brands Inc. Nov. 1 and has a carte blanche opportunity to pursue growth and add 600 restaurants a year in the country, 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. advised the buyer consortium on the purchase, according to Monday’s exchange filing. Citic CLSA Capital Markets Ltd. advised Citic on the deal, while Citic Securities Co. acted as the conglomerate’s financial adviser in China, the filing shows.
News by Bloomberg, edited by Hospitality Ireland
