Dealtalk: McDonald's targeting buyout firms as it seeks to sell North Asia stores
14/04/2016 24:00
(For more Reuters DEAL TALKS, double click on DEALTALK/ )
By Denny Thomas
HONG KONG, April 14 (Reuters) - McDonald's Corp MCD.N is
targeting private equity firms, including Bain Capital, MBK
Partners, TPG Capital Management and Chinese state-backed
conglomerate China Resources (Holdings) for its planned sale of
2,800 restaurants in North Asia, people familiar with the matter
told Reuters.
The U.S. fast food giant is adopting a new business model in
Asia, which is now the most intense battleground for global
restaurant chains, by planning to bring in partners to own the
restaurants within a franchise operation.
Several other global restaurant operators have switched to
the so-called franchise model and McDonald's has also set a
long-term aim of being 95 percent franchised, the company said
in a statement on March 31.
Oak Brook, Illinois-based McDonald's has hired Morgan
Stanley MS.N to run the sale of the restaurants in China, Hong
Kong and South Korea, the people said. A formal sales process is
expected to kick-off in about three to four weeks, one of the
people said.
Ahead of that, McDonald's and its advisor are drawing up a
list of likely partners who will be approached to participate in
the auction, the person added.
The franchise partners would likely end up owning a majority
stake in the restaurants in each market, or even as much as 100
percent, and be responsible for future capital spending. The
precise structure of the deal is still to be decided, the
sources said. In return, McDonald's will get a one-time
franchise payment and ongoing royalty fees, which usually range
between 3-5 percent of annual turnover.
Asia-focused Baring Private Equity Asia is the other buyouts
firm likely to be invited to the auction process, banking
sources familiar with the process said.
McDonald's declined to add to the March 31 statement. China
Resources, MBK, Bain, TPG and Baring all declined to comment.
Morgan Stanley didn't respond to an email seeking comment.
McDonald's does not break out country-by-country revenue
details. It is China's No. 2 fast food chain behind YUM Brands
Inc YUM.N , which operates the KFC and Pizza Hut chains.
McDonald's is leaning towards finding separate partners in
all the three markets and would likely offer a majority stake to
make the deal appealing to buyers, the people added.
The private equity firms are attracted to the rapid growth
opportunity available in the so-called quick-service
restaurants' (QSR) business in Asia.
"In recent years, even though formal dining may have been
impacted by the austerity measures, QSR as a format is growing
pretty rapidly," said Kiki Yang, a Greater China partner at
consulting firm Bain & Co.
"QSR has the format that a lot of investors like because of
the growth of the segment, standardized procedures and it's easy
to expand."
China Resources (Holdings), which is the parent of brewing
company China Resources Beer Holdings 0291.HK , and operates
Pacific Coffee chains in Hong Kong, China, Singapore and Macau,
has previously expressed interest in expanding its retail
footprint.
"This will attract a lot of sponsor interest," said one
senior Hong Kong-based M&A banker familiar with the McDonald's
process. "For one, it's an established business and second such
assets rarely come to market in Asia."
Buyout firms from KKR & Co KKR.N to Carlyle Group CG.O
and others have raised billions of dollars in new funds in Asia
to benefit from the region's growth potential. But the lack of
opportunities to gain control of businesses and stiff asking
prices have left the Asia private equity industry sitting on
about $140 billion of "dry powder" or unemployed capital,
according to data provider Preqin.
Apart from the proceeds from a sale, a deal would lower
McDonald's capital spending needs, which totaled $2.6 billion
last year.
McDonald also plans to open 1,500 more restaurants in China
and Hong Kong over the next five years, to tap the region's
rapid growth.
However, McDonald's and Yum, have been facing increasing
competition from cheaper local rivals, particularly in China,
where they are both trying to recover from food safety scares.
Yum is also in the process of spinning off its 6,900 China
restaurants, and is in talks with buyouts firms, including KKR
and Hopu Investments to sell up to a 20 percent stake after
battling sliding sales over the past few quarters. urn:newsml:reuters.com:*:nL3N16W1XY.
Bruised by food safety scandals and changing tastes,
McDonald's is also selling a big stake in its Japanese arm.
Buyout firms, including Bain Capital, Permira PERM.UL and MBK,
were among those who submitted bids for the McDonald's Japan
stake earlier this year, though it was unclear if a deal is
close. All three buyout firms declined comment.
McDonald's has struggled in Japan over the past two years,
closing more than 150 restaurants last year, remodeling almost
3,000 and posting a $310 million net loss in 2015.
McDonald's owns 49.99 percent of its Japanese arm McDonald's
Holdings 2702.T , according to the company's website, and
intends to cut that to about 20 percent.
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McDonald's restaurants in Asia http://tmsnrt.rs/1oWcE36
McDondald's vs Yum in China http://reut.rs/1Pz3y8U
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(Reporting by Denny Thomas; Additinal reproting by Gaurav Dogra
in Bangalore, Elzio Barreto in Hong Kong, Lisa Baertlein in Los
Angeles and Junko Fujita in Tokyo; Editing by Martin Howell in
Singapore)
((denny.thomas@thomsonreuters.com; +852 2843 6358; Reuters
Messaging: denny.thomas.thomsonreuters.com@reuters.net))
Keywords: MCDONALDS CHINA/SALE