McDonald's Corp has agreed to sell majority of its China and Hong Kong-based business to state-owned conglomerate CITIC Ltd and private equity firm Carlyle Group. The fast food giant is seeking to expand its operations in the country without using much of its capital.
The new partnership gives CITIC and Carlyle franchise rights for 20 years. CITIC will have a controlling stake of 52 percent while Carlyle will take 28 percent. Meanwhile, McDonald's will be retaining a 20 percent stake.
"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," said McDonald's chief executive Steve Eastbrook.
The sale piqued the interest of international private-equity funds and local companies. According to sources, TPG Capital exited the race, leaving its partner Chinese grocery operator Wumart Stores Inc. to compete against CITIC and Carlyle. Another partnership that was interested in the deal was Bain Capital and Chinese hotelier GreenTree Hospitality.
"McDonald's opted for a franchise deal to save on investing and modernizing stores itself," said Ben Cavender, a senior analyst at China Market Research.
Prior to the deal, he said that McDonald's can be more profitable if it is asset light and make money off franchise fees and leave the heavy lifting to somebody else.
McDonald's China operations is currently composed of 2,400 fast food restaurants in the mainland while roughly 240 in Hong Kong. With this new deal, they are planning to add 1,500 more in the two areas over the next five years. The partnership is also planning to boost sales at their existing restaurants, primarily through menu innovation.
Despite this new deal, it seems that McDonald's still has to figure out how to expand and retain its customers in the area. China has seen the boom of quick-service Chinese restaurant chains and people are now shifting toward healthier diets.
Challenges aside, China still remains a large untapped market for McDonald's and presents a great business potential for the fast food giant and its local partners.