PE firms in bid for McDonald’s China and Hong Kong outlets

November 2016 | DEALFRONT | PRIVATE EQUITY & VENTURE CAPITAL

Financier Worldwide Magazine

Since US fast food titan McDonald’s Corp announced in March that it was looking to reorganise its Asian operations, bringing in partners and switching to a less capital-intensive franchise model, the company has attracted considerable attention from a number of would-be partners.

The firm’s Hong Kong and China outlets in particular had proved to be attractive propositions with global private equity firms Carlyle Group and TPG Capital separately believed to be teaming up with Chinese partners hoping to acquire McDonald’s business in the region.

Carlyle is believed to have joined with Chinese state conglomerate CITIC Group. TPG, on the other hand, has teamed up with mini-market operator Wumart Stores. Real estate firm Sanpower Group has also made an approach for the assets after announcing that it was partnering with the Beijing Tourism Group. The interest of both CITIC and Sanpower in McDonald’s assets is particularly notable given that neither company has any prior experience in the food space.

McDonald’s, much like rival Yum Brands, the parent company of the KFC, Pizza Hut and Taco Bell chains, is turning to local investors to help turn around its ailing businesses in China’s rapidly expanding consumer market. Both McDonald’s and Yum have suffered a rash of food scandals in the China and Hong Kong region and have struggled to adapt to quickly changing consumer tastes there. By teaming up with local partners and private equity groups, McDonald’s will be able to maintain its presence in the lucrative Chinese market without having to endure the challenges of direct ownership.

To date, McDonald’s, which entered the Chinese market in 1992, has managed its outlets under a corporate owned structure; however, moving forward the company will adopt a franchise model for all of its Chinese and Hong Kong outlets, much like it does in the US. Accordingly, McDonald’s will sell a 20 year franchise operating agreement to run outlets to potential bidders. The licence agreements would also likely contain a 10 year extension option. As a result, McDonald’s will continue to hold branding and product development rights over existing and new restaurants, while bringing in around as much as $3bn for the 20 year operating licence.

In many respects, the length of the potential operating licences offered by McDonald’s is anathema to the typical approach adopted by PE firms, which look to cash out of their investment after a few years. Accordingly TPG, Carlyle and others have looked to partner with local strategic bidders which might closely resemble the type of profile that McDonald’s has said it is looking for to remain in an investment long term. As a result, buyout firms are likely to be minority partners in any potential deal.

Presently, McDonald’s has 2200 locations in China. Although the company opened new locations over the last 12 months, its market share has continued to decline. Much of this decline can be attributed to the changing tastes of consumers, as well as shifting perceptions of American fast food in the country. Where once a trip to an American outlet such as McDonalds was confined to special occasions – and prices reflected this status – the Chinese consumer market has expanded and US fast food is now more of a casual dining option. Amid hugely increased competition from other US and domestic food options, McDonald’s and Yum’s brands have found themselves marginalised. The Chinese Communist Party’s economic and competition policy has also shifted of late, favouring domestic businesses over their foreign counterparts.

Primavera Capital, run by former chairman of Goldman Sachs’ Greater China division Fred Hu, will buy a combined stake of $460m in Yum China, along with Ant Financial Services, an affiliate of Alibaba Group, according to the Wall Street Journal.

Richard Summerfield