Investment, Private Equity

CITIC, Carlyle To Acquire McDonald’s China Business for US$2.08 billion

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Chinese financial services group CITIC Ltd. and its alternative investment unit CITIC Capital Holdings have teamed up with the Carlyle Group to acquire McDonald’s mainland China and Hong Kong business for up to US$2.08 billion to revamp and grow the U.S. fast-food giant’s operations in China, the firms announced today.

After the completion of the transaction, CITIC and CITIC Capital will have a controlling stake of 52%, while Carlyle and McDonald’s will have interests of 28% and 20%, respectively.

The four companies have formed 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 buyers will settle the payment by cash and by new shares in the company issued to McDonald’s. They plan to use their combined expertise to accelerate growth in McDonald’s business through new restaurant openings, particularly in China’s smaller cities, and to improve sales performance in existing restaurants.

The focus will be on key areas such as menu innovation, enhanced restaurant convenience, retail digital leadership and delivery. The buyers said they intend to add over 1,500 restaurants in China and Hong Kong over the next five years.

As part of its turnaround plan announced in May 2015, McDonald’s is aiming to re-franchise 4,000 restaurants by the end of 2018, with the long-term goal of becoming 95% franchised. As a result of this transaction, McDonald’s is re-franchising more than 1,750 company-owned stores in China and Hong Kong.

Similarly, fast-food operator Yum! Brands, which owns the Taco Bell, KFC and Pizza Hut brands, also spun off its China division last year. Yum! China received US$460 million investment from Chinese private equity firm Primavera Capital Group and Ant Financial Services Group last September to help lead its future growth in the country.

"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," said McDonald’s CEO Steve Easterbrook in a statement.

China’s working population is larger than those of the U.S. 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 are expected to continue to spend more on leisure and dining out, particularly in smaller cities where there is great growth potential.

This transaction is another step in state-backed Chinese financial services group CITIC’s efforts to better balance its financial and non-financial businesses.

"Together with our partners, we will devote ourselves to continue upholding McDonald’s extremely high standards of food quality and service," said Chang Zhenming, chairman of CITIC Ltd. "McDonald’s extensive network and consumer base will provide us with invaluable insights, which we will leverage to the benefit of our existing businesses."

As part of the deal, Zhang Yichen, chairman and CEO of CITIC Capital, will serve as chairman of the board of the new company. X.D. Yang, managing director and co-head of the Asia buyout team of the Carlyle Group will serve as vice chairman of the new company.

Carlyle is investing via its Carlyle Asia Partners IV vehicle. The deal is expected to close in mid-2017.

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