In a deal valued at up to $2.08 billion, McDonald's Corporation said today it's turning over its controlling stake in its China business to a Chinese state-owned entity, CITIC Capital Holdings. Upon the deal's completion, McDonald's will form a partnership with CITIC Limited, CITIC Capital Holdings and The Carlyle Group to form a company that will act as the master franchisee responsible for McDonald's businesses in mainland China and Hong Kong for a term of 20 years, according to a McDonald's news release.
The cash and shares settlement gives 52 percent of the China business to CITIC and CITIC Capital, 28 percent to Carlyle and 20 percent to McDonald's. 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. The focus will be on key areas such as menu innovation, enhanced restaurant convenience, retail digital leadership and delivery. The new company plans to add more than 1,500 restaurants in China and Hong Kong over the next five years.
"China and Hong Kong represent an enormous growth opportunity for McDonald's," McDonald's CEO Steve Easterbrook said in a news release. "This new partnership will combine one of the world's most powerful brands and our unparalleled quality standards with partners who have an unmatched understanding of the local markets and bring enhanced capabilities and new partnerships, all with a proven record of success. By working together, we will unlock even faster growth and be closer to the customers and communities we serve as McDonald's works to be the leading Quick Service Restaurant across the Chinese mainland and Hong Kong."
China's consumer sector is growing rapidly, due to the population's overall move to the cities, an expanding middle class and increasing disposable household incomes, McDonald's said. Though the number of workers in China exceeds that of hte US and Europe combined, McDonald's said spending levels are just a fraction of those in more developed countries. But McDonald's said disposable incomes are expected to grow there, particularly in some of the major cities with large growth potential, opening a greater QSR sector opportunity.
"We believe CITIC's unique platform and its extensive resources will enable us to help realize McDonald's full potential in China," CITIC Limited Chairman Chang Zhenming said in a news release. "Importantly, this is also a strategic opportunity for CITIC to invest in the expanding Chinese consumer sector. McDonald's extensive network and consumer base will provide us with invaluable insights, which we will leverage to the benefit of our existing businesses."
Equity for the transaction comes from Carlyle Asia Partners IV. As of Sept. 30,2016, Carlyle had invested more than $7 billion of equity in approximately 90 transactions in China, according to the news release.
CITIC Capital Chairman and CEO Yichen Zhang will serve as chairman of the board of the new company. Managing Director and Co-Head of the Asia buyout team of The Carlyle Group X.D. Yang will serve as vice chairman of the board of the new company.
"McDonald's core business proposition and potential in China is clear," Zhang said. "We will work closely with the existing management team and partners, including Beijing Capital Agribusiness Group, to respond to local market expectations and continue to expand and improve the business to meet the needs of the Chinese consumer."
As part of its turnaround plan announced in May of 2015, McDonald's committed to refranchising 4,000 restaurants by the end of 2018, with the long-term goal of becoming 95 percent franchised. As a result of this transaction, McDonald's is refranchising more than 1,750 company-owned stores in China and Hong Kong. At the end of 2016, McDonald's had more than 2,400 restaurants in mainland China and more than 240 restaurants in Hong Kong.
McDonald's is Hong Kong's largest QSR chain and the second largest in China, after KFC's 5,000 outlets. Louisville-based Yum, broke off its China business last fall, bBut just this morning, another Yum Brand announced that it is entering China. As reported on QSRweb.com, Yum has opened its first Taco Bell outlet in China in Shanghai with plans to expand.
The McDonald's deal must receive regulatory approval, which is expected by the middle of this year.