McDonald’s Corporation announced Monday, along with CITIC Limited, CITIC Capital Holdings, and The Carlyle Group, the formation of a partnership and 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.
The total consideration payable by the new company to acquire McDonald’s mainland China and Hong Kong business is up to $2.08 billion. The consideration will be settled by cash and by 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 percent, while Carlyle and McDonald’s will have interests of 28 percent and 20 percent, respectively.
McDonald’s CEO Steve Easterbrook says, “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.”
China’s consumer sector is growing rapidly, benefiting from continued urbanisation, an expanding middle class and increasing disposable household incomes. China’s working population is larger than those of the United States 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. As such, the market for Western Quick Service Restaurants is expected to continue to grow rapidly.
For CITIC, this 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. This transaction is another step in CITIC’s efforts to better balance its financial and non-financial businesses. CITIC also sees opportunities for synergies with its existing businesses.
Chang Zhenming, chairman of CITIC Limited, says: “We believe CITIC’s unique platform and its extensive resources will enable us to help realize McDonald’s full potential in China. Together with our partners, we will devote ourselves to continue upholding McDonald’s extremely high standards of food quality and service. Importantly, this is also a strategic opportunity for CITIC to invest in the expanding Chinese consumer sector. For Carlyle, this investment offers the chance to partner with an iconic brand with sizeable market share and growth potential in China. Carlyle has years of strong investment and operating experience in the global consumer and retail sector, and is well positioned to drive further growth of the new company.
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. 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.
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. The deal is contingent upon relevant regulatory approvals and is expected to close in mid-2017.
