By Wayne Ma in Beijing, Kane Wu in Hong Kong and Julie Jargon in Los Angeles
McDonald's Corp. was one of the first American brands to strike
gold in China, becoming a symbol of the Asian giant's opening to
the West. Now as competition grows in China, the restaurant chain
is handing over the reins to a Chinese state-owned enterprise, in a
deal that would value the business at up to $2.08 billion.
The Oak Brook, Ill., company 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 firm 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 for the majority
stake, to be held by Citic and Carlyle, depending on a final
valuation of the China assets.
The China business has become much more competitive and complex
since McDonald's entered the country in the early 1990s, McDonald's
Chief Executive Steve Easterbrook said in an interview. Chinese
consumers have become more concerned about their health and more
skeptical of fast food after a number of food-safety scares. A
supplier to both McDonald's and competitor Yum Brands Inc. in 2014
was accused of selling them expired chicken and beef.
And McDonald's and other Western brands have been slow to adapt
menu offerings to local tastes at a time of increasing competition
from Chinese rivals. Many people have turned to cheaper local
restaurants like noodle joints as China's economy has slowed.
McKinsey & Co. found in a recent survey of 10,000 Chinese
consumers that 51% had eaten Western fast food in 2015, down from
67% in 2012.
Selling its China operations will free McDonald's from having to
foot the bill for opening more stores in the world's second-biggest
economy, Mr. Easterbrook said. Mr. Easterbrook previously said he
wants to make China the burger giant's No. 2 market, up from third
now behind the U.S. and Japan.
"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 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.
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
Yum 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 are now coming under government
scrutiny.
Mr. 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.
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 has long-term plans to franchise 95% of its stores
and is looking to do a similar sale in South Korea, Mr. Easterbrook
said. He said McDonald's has no plans for a spin off in Russia,
where it owns and operates about 600 stores.
Restaurant Brands International Inc. led the asset-light trend,
with nearly all its Burger King restaurants owned by franchisees.
The company in 2014 bought Canadian doughnut chain Tim Hortons,
also a franchise model, partly for that reason. The company has
expanded the Burger King brand globally and opened more Tim Hortons
franchises in the U.S.
Yum Brands also moved recently to lighten up its assets,
spinning off its more than 5,000 KFCs and about 2,000 Pizza Huts 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.
"That isn't McDonald's rightful place," Mr. Zhang said.
McDonald's said 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 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.
Write to Wayne Ma at wayne.ma@wsj.com, Kane Wu at
Kane.Wu@wsj.com and Julie Jargon at julie.jargon@wsj.com
(END) Dow Jones Newswires
January 09, 2017 15:59 ET (20:59 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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