McDonald’s to target growth in smaller Chinese cities after Citic deal closes, says chairman

More than half of the 1,500 new restaurants will open in third and forth tier cities on the mainland

PUBLISHED : Monday, 06 March, 2017, 8:57pm
UPDATED : Monday, 06 March, 2017, 10:41pm

The US$2.1 billion Citic deal to acquire McDonald’s Hong Kong and mainland businesses will close as soon as July if China’s Ministry of Finance approves the deal, Citic Capital Holding’s chairman Zhang Yichen said.

Citic would maintain the market “positioning” and pricing strategy of McDonald’s in the Hong Kong market, Zhang said on the sidelines of the NPC and CPPCC meetings in Beijing on Monday.

Citic will take a 52 per cent stake of the McDonald’s businesses through two entities if the deal closes.

To drive business growth in the Hong Kong market, where McDonald’s operates 240 restaurants and has had a presence for 41 years, Citic will focus on improving digital marketing, expanding the delivery business, and increasing consumption per capita by offering premium products, Zhang said.

For the mainland market, Zhang said more than half of the new restaurants opened would be in “third and fourth tier cities”.

It plans to open 1,500 McDonald’s restaurants in five years, Citic said in an earlier statement.

“These cities have enormous potential as consumer are upgrading...but McDonald’s didn’t make major efforts in tapping this market. They were wrong,” he said.

These cities have enormous potential as consumer are upgrading...but McDonald’s didn’t make major efforts in tapping this market
Zhang Yichen, Citic Capital Holding’s chairman

As for investment plans in the near future, Zhang said Citic was “in negotiations” for several deals in the US market but would “put on hold” as they evaluate the overall impact of the Donald Trump presidency.

The McDonald’s deal would be funded wholly in US dollars, Zhang said, noting that it was different from Citic’s earlier cross-border investments including privatisation of the Nasdaq listed Focus Media.

“We used part of our renminbi funds when joining in the delisting investment of Focus Media, but for [the McDonald’s] deal we took into account the potential risks brought about by tightened capital controls,” he said.

Nothing to love about McDonald’s China deal with Citic, Carlyle

As for whether Citic paid a high premium for McDonald’s in order to beat other bidders including Bain Capital and its Chinese partner, Zhang disagreed.

“You would know it was good for money as I have a thorough knowledge of McDonald’s ebitda,” he said, without giving further details.

After decades of fast growth on the mainland, US based fast food chains McDonald’s and Yum have both come under pressure in China as consumers in top-tier cities change their spending habits to healthier eating following a number of food hygiene scandals.

Last September, Yum agreed to sell a combined US$460 million stake in its Chinese operations to Primavera Capital Group and Ant Financial Services Group, a subsidiary of Alibaba, owner of the South China Morning Post.

Chinese state-backed conglomerate Citic Ltd, Citic Capital Holdings and US private-equity firm Carlyle Group will acquire 80 per cent of the McDonald’s Greater China operations in a deal valuing the business at as much as US$2.08 billion, according to a statement in early January.

Under the agreement, Citic and Citic Capital Partners will jointly take a 52 percent stake, while Carlyle will hold 28 per cent.