Mergers & Acquisitions

Citic, Carlyle to buy McDonald’s franchise in Hong Kong, China in a deal worth US$2.08 billion

Buyers intend to add more than 1,500 restaurants in China and Hong Kong over the next five years, according to deal agreement

PUBLISHED : Monday, 09 January, 2017, 12:50pm
UPDATED : Tuesday, 10 January, 2017, 10:10am

In a deal worth US$2.08 billion, McDonald’s said it will sell 80 per cent of its fast-food restaurant business in Hong Kong and mainland China to the largest Chinese international trust company and US private equity firm Carlyle Group.

After the cash-and-shares transaction, CITIC and CITIC Capital will own a 51 per cent controlling stake, while Carlyle will own 28 per cent. McDonald’s, based in Illinois, US, will keep a 20 per cent interest in the company, according to a press release put out by the three companies.

The new partnership will act as the master franchisee responsible for McDonald’s businesses in mainland China and Hong Kong for the next 20 years, the press release said.

After the deal, more than 1,500 restaurants will be opened in China and Hong Kong over the next five years, it said.

McDonald’s currently owns 2,400 outlets in China, and 240 in Hong Kong.

Brett McGonegal, Capital Link International chairman and CEO, said: “China can be tricky and sometimes the economics don’t justify the attention and human capital necessary to continue on with the prevailing strategy, plus the market is becoming much more competitive in the fast food space.

“It is likely McDonald’s didn’t see the return profile as being sufficient to continue with full ownership. The local players are much more nimble and often have more boots on the ground and can maximise the current footprint while also pursuing scale and growth strategies to bring the current platform to the next level,” he added.

The partnership will use its “combined expertise and resources” to accelerate growth in McDonald’s business through new restaurant openings, particularly in tier 3 and 4 cities, and to improve sales performance in existing restaurants, according to the press release.

The focus will be on key areas such as menu innovation, enhanced restaurant convenience, retail digital leadership and delivery, it said.

McDonald’s CEO Steve Easterbrook said: “China and Hong Kong represent an enormous growth opportunity for McDonald’s.”

Sales at established McDonald’s stores in China have shrunk after one of its suppliers was discovered to be using expired and contaminated chicken and beef in July 2015.

According to the company’s quarterly financial report for July to September last year, net profit margin declined by 3 per cent year on year in the China market.

McDonald’s is not the only American fast-food brand facing challenges in China after two decades of rapid growth, as consumers change their habits amid higher incomes and a shift towards healthier food.

In late September, McDonald’s biggest rival Yum Brands sold a slice of its China operation, which contains KFC, Pizza Hut and Taco Bell chains to a unit of Alibaba and Chinese private equity fund Primavera Capital for US$460 million.

McDonald’s shares closed at US$120.76 in New York on Friday, up 0.89 per cent on the session and extending their three month gain to around 6.44 per cent.

Still, it was one of the worst-performing components of the Dow Jones Industrial Average last year, rising a meagre 3 per cent, as sales slows down in its home market.