This strategic change will be hugely beneficial for McDonald as it will be largely absolved of fluctuations in China’s turbulent economy but will come with assured yearly royalties.
As per sources who are familiar with the matter at hand, McDonald’s Corp intends to tap private equity firms, including TPG Capital Management, Bain Capital, China Resources (Holdings) and MBK Partners for its strategic sale of 2,800 restaurants in North Asia.
This approach signals a new strategic change in the operational model of the U.S. based fast food giant in Asia. Of note is the fact that Asia has now become the battleground for global restaurant chains who are fighting a feverish battle to increase their footprint in the region. As per sources, McDonald is likely to approach the Asian restaurant market with a franchise model.
It is not alone in adopting the franchise model, as several other global restaurant chains have also switched to it. As per its statement as of March 31, it plans of being 95% franchised.
As per anonymous sources, Morgan Stanley has been hired by the Illinois-based fast food giant to sell its restaurants in Hong Kong, China and South Korea. The formal sales process is likely to begin in three or four weeks, said a source. The source went on to add, that McDonald and Morgan Stanley are drawing up a list of likely partners who will be approached to participate in the auction process.
The franchisees could end up owning a majority stake, which could be as high as 85% to 100% and be responsible for future capital growth. However, the source underlined the fact that the precise structure is yet to be decided. On its part, McDonald will get a one-time franchise payment along with yearly royalty fees, which typically hover in the range of 3% to 5% of annual turnover.
As per banking sources who are familiar with the process, Baring Private Equity Asia is likely to be selected by Morgan Stanley and McDonald for participation in the auctioning process.
Of note is the fact that McDonald does not provide a country-wise breakup of its revenues. However what is known is that it is China’s second biggest fast food chain, right behind YUM Brands Inc., which operates Pizza and KFC chains.
Quick Service Restaurants (QSR) are rapidly growing and is likely to act as honey to bees, the private equity firms.
“In recent years, even though formal dining may have been impacted by the austerity measures, QSR as a format is growing pretty rapidly. 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,” said Kiki Yang, a Greater China partner at consulting firm Bain & Co.
“This will attract a lot of sponsor interest. For one, it’s an established business and second such assets rarely come to market in Asia,” said a senior Hong Kong-based M&A banker familiar with the McDonald’s process.
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