Services

McDonald's Dumps 80% of China Operations

Douglas A. McIntyre

Published: January 9, 2017 6:35 am

Last Updated: January 12, 2020 4:03 pm

McDonald’s Corp. (NYSE: MCD) must be very unhappy with its China business. It has sold 80% of its operations there to two financial firms. The reasons for the decision were not very well articulated.

According to the fast-food company:

CITIC Capital Holdings, Carlyle Group, and today announced a strategic partnership And set up a new company, the company will become McDonald’s in the next two decades in mainland China and Hong Kong’s main franchisee.

The new company will be up to 2.08 billion US dollars (about 16.14 billion Hong Kong dollars) of the total consideration of the McDonald’s in the Chinese mainland and Hong Kong business. The consideration for the Acquisition will be settled in cash and in part by the issue of new shares to McDonald’s. After completion of the transaction, CITIC shares and CITIC Capital in the new company will hold a total of 52% of the controlling interest, Carlyle and McDonald’s were held 28% and 20% of the shares.

McDonald’s said the deal would help it enhance its growth in China. However, with its balance sheet and global brand strength, McDonald’s ought to be able to accomplish that on its own. The America-based public corporation said the deal would help it expand into “third and fourth tier cities.” This is part of a strategic program for McDonald’s to add 1,500 locations in China and Hong Kong over the next five years. The company says most of its locations eventually will be franchises, a strategy McDonald’s uses elsewhere.

Among McDonald’s challenges is that it has saturated the U.S. market and struggles to improve same-store sales, which were only 1.3% higher in the third quarter.

It remains to be seen if this kind of regional joint venture will do McDonald’s any good. It does need to jump-start its overseas business, as competition in its home market makes growth less likely.