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McDonald's (MCD) Reduces Stake in China Division to 20%
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Fast-food giant McDonald’s Corporation (MCD - Free Report) recently entered into a strategic partnership with CITIC Limited, CITIC Capital Holdings and The Carlyle Group LP (CG - Free Report) to form a master franchisee company in charge of McDonald's operations in mainland China and Hong Kong.
The Deal
Total consideration of around $2.1 billion will be payable by the newly formed company to purchase McDonald’s China division. The amount will be settled partly in cash and partly by issuing shares in the new company to McDonald’s.
Post the completion of the transaction, CITIC and CITIC Capital will have a controlling stake of 52%, Carlyle will hold 28% while McDonald’s share will be brought down to 20%.
The 20-year partnership is expected to accelerate McDonald’s growth in the region by pooling together available skills and resources. As of Dec 31, 2016, there were around 2,400 McDonald’s outlets in China and 240 in Hong Kong. The partnership aims to add over 1,500 stores more in the region in the next five years. Along with unit expansion, the company’s focus will be on menu innovation, improved restaurant expediency, digital headship and smooth delivery.
As part of its turnaround plan announced in May 2015, McDonald's aimed at refranchising its 4,000 restaurants by the end of 2018, with the long-term goal of becoming 95% franchised. Through this transaction, McDonald's is refranchising over 1,750 company-owned stores in the region.
China’s Prospects
A growing middle class with rising disposable household income is expected to lead China’s consumer sector’s growth. Though boasting a working population larger than that of the U.S. and Europe combined, spending levels of China's middle class are a small proportion of those in more developed countries. Thus, as disposable incomes rise, consumer discretionary spending in the field of leisure and dining out is expected to increase too, thereby making it a lucrative region for Western Quick Service Restaurants.
McDonald’s aims to leverage its position in smaller cities where disposable income is expected to increase. This deal thus stands to be a positive for McDonald’s, which has seen its Chinese business suffer off-late due to various factors including tough competition from the largest established Western Quick Service Restaurant chain – KFC, a division of the recently spun-off YUM! China Holdings, Inc. (YUMC - Free Report) .
Bottom Line
Shares of McDonald’s have moderately outperformed the Zacks categorized Retail-Restaurants industry in the past one year. While the company grew 3.2%, the broader industry gained only 0.1%, in the same time frame.
Meanwhile, cut-throat competition from similar restaurateurs with healthier food options like Panera Bread Company , also limits the upside potential.
Nonetheless, the recent sell-off is expected to propel the positive performance further as the company gains from trimming its overall cost of operations and preserving its capital. This will bring McDonald's closer to its aim of becoming the leading Quick Service Restaurant across the Chinese mainland and Hong Kong.
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McDonald's (MCD) Reduces Stake in China Division to 20%
Fast-food giant McDonald’s Corporation (MCD - Free Report) recently entered into a strategic partnership with CITIC Limited, CITIC Capital Holdings and The Carlyle Group LP (CG - Free Report) to form a master franchisee company in charge of McDonald's operations in mainland China and Hong Kong.
The Deal
Total consideration of around $2.1 billion will be payable by the newly formed company to purchase McDonald’s China division. The amount will be settled partly in cash and partly by issuing shares in the new company to McDonald’s.
Post the completion of the transaction, CITIC and CITIC Capital will have a controlling stake of 52%, Carlyle will hold 28% while McDonald’s share will be brought down to 20%.
The 20-year partnership is expected to accelerate McDonald’s growth in the region by pooling together available skills and resources. As of Dec 31, 2016, there were around 2,400 McDonald’s outlets in China and 240 in Hong Kong. The partnership aims to add over 1,500 stores more in the region in the next five years. Along with unit expansion, the company’s focus will be on menu innovation, improved restaurant expediency, digital headship and smooth delivery.
As part of its turnaround plan announced in May 2015, McDonald's aimed at refranchising its 4,000 restaurants by the end of 2018, with the long-term goal of becoming 95% franchised. Through this transaction, McDonald's is refranchising over 1,750 company-owned stores in the region.
China’s Prospects
A growing middle class with rising disposable household income is expected to lead China’s consumer sector’s growth. Though boasting a working population larger than that of the U.S. and Europe combined, spending levels of China's middle class are a small proportion of those in more developed countries. Thus, as disposable incomes rise, consumer discretionary spending in the field of leisure and dining out is expected to increase too, thereby making it a lucrative region for Western Quick Service Restaurants.
McDonald’s aims to leverage its position in smaller cities where disposable income is expected to increase. This deal thus stands to be a positive for McDonald’s, which has seen its Chinese business suffer off-late due to various factors including tough competition from the largest established Western Quick Service Restaurant chain – KFC, a division of the recently spun-off YUM! China Holdings, Inc. (YUMC - Free Report) .
Bottom Line
Shares of McDonald’s have moderately outperformed the Zacks categorized Retail-Restaurants industry in the past one year. While the company grew 3.2%, the broader industry gained only 0.1%, in the same time frame.
However, a dull domestic sales environment somewhat dims the sparkle for this Zacks Rank #3 (Hold) company. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Meanwhile, cut-throat competition from similar restaurateurs with healthier food options like Panera Bread Company , also limits the upside potential.
Nonetheless, the recent sell-off is expected to propel the positive performance further as the company gains from trimming its overall cost of operations and preserving its capital. This will bring McDonald's closer to its aim of becoming the leading Quick Service Restaurant across the Chinese mainland and Hong Kong.
Zacks' Top 10 Stocks for 2017
In addition to the stocks discussed above, would you like to know about our 10 finest tickers for the entirety of 2017?
Who wouldn't? These 10 are painstakingly hand-picked from 4,400 companies covered by the Zacks Rank. They are our primary picks to buy and hold. Be among the very first to see them >>