January 10, 2017

Chinese state-backed conglomerate, CITIC Ltd. and private equity firm, Carlyle Group have acquired an 80 percent stake in McDonald’s mainland China and Hong Kong business for US$2.08 billion.

Under the terms of the deal, CITIC and its investment unit, CITIC Capital Holding, will gain a controlling interest of 52 percent, while Carlyle will hold 28 percent, and Illinois-based McDonald’s will retain 20 percent of the newly-formed company. CITIC and Carlyle also will be granted franchise rights for 20 years. Originally, McDonald’s was looking for a deal valued closer to $3 billion, reports Reuters, but decided to retain a minority stake in the business to capitalize upon future expected growth in these Chinese market.

The new partnership, which is expected to close by mid-2017, is part of McDonald’s strategic plan to reorganize and streamline operations as it faces competition from a wide field of rivals better positioned to react to the consumer market.

Facing the reality of four years of slowing business in the U.S., and a slowing of growth in China following a string of food safety scandals, McDonald’s CEO, Steve Easterbrook, is looking to pursue a revival in Asia through the transformation of the business’ menu, increased digital integration, enhanced convenience, delivery options, improved sales in existing restaurants, and a rapid geographic expansion of its restaurants, with plans to add 1,500 new locations throughout China and Hong Kong over the next five years.

“China and Hong Kong represent an enormous growth opportunity for McDonald’s,” said Easterbrook in a joint statement.  ”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.”

Battle Buddies

Private equity rivals began positioning themselves with domestic Chinese partners to bid for control of the McDonald’s China and Hong Kong units toward the end of last year.

In September 2016 GAI News reported that Carlyle was partnering with CITIC, while TPG was joining with Beijing Capital Agribusiness Group, an existing McDonald’s partner, in the hopes that domestic partnerships would better appeal to McDonald’s desire for long-term tie-ups rather than a shorter-term exit.

Other rivals that were expected to bid were China Cinda Asset Management Co.; Beijing Tourism Group and Sanpower Group – a private technology and real estate firm; and Bain Capital and its partner, Chinese hotelier GreenTree Hospitality, according to Bloomberg.

“Asia represents a significant area of opportunity for McDonald’s to blend our global quality standards with local insights and expertise from partners who share our vision and values,” said Easterbrook in a company statement last year. “This will allow McDonald’s to accelerate our growth and scale faster across diverse markets, placing us closer to our customers and the communities we serve.”

Across Asia

The announcement of this deal follows other moves by McDonald’s and private equity players in the Asian marketplace as demographic shifts and rising disposable income create an increasingly crowded space, but also offer potential to tap into promising growth markets.

In September 2015 GAI News reported that McDonald’s India was planning a US$113 million investment to intensify operations and to double its number of restaurants in the western and southern regions of the country.

McDonalds, which was the first quick service restaurant to enter the Indian market two decades ago, plans to add an additional 250 restaurants to its current 213 by 2020, and is shifting its strategy and catering to meet consumer demands by offering healthier options including coffee made from locally sourced arabica beans through the company McCafe’s, and reducing the calorie content of its sauces by between 60 and 70 percent.

More recently however, McDonald’s sold its franchising rights in Singapore and Malaysia to Saudi Arabian group, Lionhorn Pte Ltd., for an undisclosed amount. Deal Street Asia reports that under the terms of the deal, Lionhorn has acquired the company’s existing 390 restaurants, of which 80 percent are company-owned.

The Upside

For CITIC, the deal offers the conglomerate greater access to the consumer sector in a market that is expected to benefit from urbanization and rising disposable incomes, while also helping the financial group to better balance its financial and non-financial sheets and create synergies between its existing businesses.

For Carlyle, which is conducting this transaction through its Carlyle Asia Partners IV fund, the benefit lies in the name, and the ability to partner with one of the world’s most iconic brands in one of the top markets in the world for potential growth. Having completed approximately 90 deals in China at a value of $7 billion as of September 30, 2016, Carlyle has a well of investment and operating experience in the market that can be applied to drive further growth for the new partnership.

“Carlyle and CITIC have a strong history of partnering together,” said Mr. X.D. Yang, managing director and co-head of the Asia buyout team with Carlyle, and who will serve as vice chairman of the board of the new company. “Today, we are pleased to cooperate with CITIC again, alongside McDonald’s, on one of our largest deals in China. This substantial investment demonstrates our confidence in the strength of the Chinese consumer.”

Upon the closing of the deal, the board of the new business will include representatives from The Carlyle Group, CITIC, CITIC Capital, and McDonald’s. The existing management team at McDonald’s will remain in place to lead the business.

–Lynda Kiernan