McDonald's, bullish on China growth prospects, boosts stake in local business

MCDONALD’S said it has struck a deal to ramp up its stake in its China business to just under 50 per cent, in a show of confidence in the burger chain’s growth prospects in the world’s second-largest economy.

The move contrasts sharply with the prevailing trend of multinational corporations reeling back investments in China, or even exiting the market due to geopolitical and economic challenges.

The deal to acquire investment firm Carlyle’s 28 per cent holding in the burger chain’s China business (which also includes its stores in Hong Kong and Macau), will send McDonald’s stake up to 48 per cent. A consortium led by state-backed conglomerate CITIC has controlling ownership, with a 52 per cent stake.

“We believe there is no better time to simplify our structure, given the tremendous opportunity to capture increased demand and further benefit from our fastest-growing market’s long-term potential,” McDonald’s chief executive Chris Kempczinski said in a statement.

Financial terms were not disclosed, but two sources said the deal values the China unit at around US$6 billion.

That is far more than its valuation in 2017, when McDonald’s agreed to sell 80 per cent of the business to CITIC, its investment arm CITIC Capital (now known as Trustar Capital) and Carlyle for up to US$2.1 billion. At the time, the US firm had wanted to pursue rapid expansion without using much of its own capital.

It is, however, less than the valuation of up to US$10 billion that Carlyle and Trustar had at one point been seeking, as part of efforts to establish a “continuation fund”, different sources have previously said. (A continuation fund is a type of investment vehicle created by private equity firms that enables them to more easily sell down their stakes in existing investments.)

The sources were not authorised to speak to media about the deal and declined to be identified. McDonald’s declined to comment on the valuation figure. Carlyle also declined to comment.

Since 2017, the number of McDonald’s stores in China has doubled to 5,500, and the country has become its second-largest market. The business aims to have more than 10,000 stores in China by 2028.

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The business has also generated sales growth of more than 30 per cent since September 2019, the company said in the statement.

McDonald’s made an unsolicited offer for Carlyle’s stake in the China operations in recent weeks, and the deal was struck quickly, said the sources.

“Having a stronger investment position should give them a better voice in making sure that the growth that they expect out of that marketplace occurs,” said Jim Sanderson, an analyst at Northcoast Research.

Reuters reported in August that Trustar Capital was planning to raise a continuation fund that would enable the Chinese private equity firm to sell down its stake in McDonald’s China.

In contrast to McDonald’s, US meat and processed food maker Tyson Foods plans to sell its China poultry business, sources have said.

British consumer goods maker Reckitt Benckiser in 2021 sold its China infant formula and child nutrition business to investment firm Primavera Capital for an enterprise value of US$2.2 billion. REUTERS