McDonald’s sells its operation in China for £1.7 billion

LONDON, ENGLAND - JUNE 25:  Assistant manager Rachel Lucien stands at the checkouts in the world's largest McDonald's restaurant which is their flagship outlet in the Olympic Park on June 25, 2012 in London, England. The restaurant, which is one of four McDonald's to be situated within the Olympic Park, will have a staff of 500. After the Olympic and Paralympic Games conclude the restaurant will be dismantled and all fixtures and fittings will be either reused or recycled.  (Photo by Oli Scarff/Getty Images)

McDonald’s this morning agreed to sell 80% of its business in China and Hong Kong as part of a strategy to franchise more of its restaurants worldwide.

The company has struck a deal with China’s largest conglomerate CITIC Limited, as well as CITIC Capital and The Carlyle Group, to create an entity that will become the largest McDonald’s franchisee outside the US. It will act as the master franchisee responsible for McDonald’s businesses in mainland China and Hong Kong for a term of 20 years.

The acquisition is worth $2.08 billion (£1.71 billion), with the amount settled by cash and new shares in the company issued to McDonald’s. After completion of the transaction, CITIC and CITIC Capital will have a controlling stake of 52%, while Carlyle and McDonald’s will have interests of 28% and 20%, respectively.

The partnership will use its combined expertise and resources to accelerate growth in McDonald’s business through new restaurant openings, particularly in tier three and four 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.

It intends to add over 1,500 restaurants in China and Hong Kong over the next five years.

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

For CITIC, the investment offers a chance to deepen its exposure to the consumer sector, which is poised to be the main driver of China’s economy for decades to come, while Carlyle sees it as a chance to partner with an iconic brand with sizeable market share and growth potential in China.

As part of a turnaround plan outlined in May 2015, McDonald’s committed to refranchising 4,000 restaurants by the end of 2018, with the long-term goal of becoming 95% franchised. As a result of this transaction, McDonald’s is refranchising more than 1,750 company-owned stores in China and Hong Kong.

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As of 31 December 2016, McDonald’s operates and franchises over 2,400 restaurants in mainland China and more than 240 restaurants in Hong Kong. It currently employs more than 120,000 staff and serves over one billion customers annually in China, making it the second largest QSR chain in the country and the largest in Hong Kong.

Upon completion of the transaction, the new company will have a board of directors with representatives from CITIC, CITIC Capital, Carlyle and McDonald’s. McDonald’s existing management team will continue to lead the business.

China’s working population is larger than those of the US and Europe combined, yet spending levels of China’s middle class are a small fraction of those in more developed countries. As disposable incomes rise, people will continue to spend more on leisure and dining out, particularly in tier 3 and 4 cities where there is great growth potential. Consequently, the market for Western quick service restaurants is expected to continue to grow rapidly.

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