Citic plans to sell its minority stake in McDonald’s China business to one of its private equity arms as part of efforts to lower its debt as Beijing pushes for large, government-backed companies to deleverage.
As part of any deal, Citic Capital, the private equity arm of the state-owned financial services group, would increase its stake in the US fast-food chain’s China operation from 20 per cent to 42 per cent, according to two people familiar with the matter.
The transaction would give McDonald’s Chinese business an enterprise value of about $3bn, one of the people said. It had an estimated enterprise value of about $2bn three years ago when Citic and Carlyle, the private equity firm, jointly bought a controlling stake in the operations from McDonald’s US parent.
The Chinese government has in recent years prodded state-owned enterprises to reduce debt, a side-effect of a years-long investment splurge. The sale will simplify the management of McDonald’s China unit, while freeing up cash that will help Citic improve its debt position, one person said.
Margins for fast-food chains in China have been squeezed over the past year owing to an outbreak of African swine fever, which has driven up the prices of ingredients such as beef and chicken.
“We expect protein input costs will continue to rise. As such, more cost management efforts are expected to be put in place to offset cost inflation,” said Michelle Huang, an analyst at Rabobank.
McDonald’s main competitor in the world’s second-biggest economy is Yum China, which runs the KFC and Pizza Hut franchises in the country. “McDonald’s is a laggard compared to Yum China. It’s not growing like people hoped after the Citic investment,” said Shaun Rein, founder of China Market Research Group, a Shanghai-based research consultancy.
Since they were acquired by Citic and Carlyle, however, McDonald’s China operations have grown significantly, opening about 400 restaurants annually in the country.
“Our top line revenue is growing a lot because we are expanding so quickly. We need a lot of” capital expenditure, said one investor in McDonald’s China business. “We aren’t looking at net profit.”
In 2018, private equity groups Hillhouse Capital and KKR launched failed bid to buy Yum China for almost $18bn.
McDonald’s efforts to catch up with Yum China brands have included a push to move more of its operations online, assisted by internet and social media group Tencent. However, McDonald’s still lags behind its rival in terms of its number of outlets, despite support from Citic’s property arm that has allowed the brand to secure prime locations in large cities such as Shanghai.
A spokesperson for McDonald’s in China said there would be a bidding process for Citic’s stake but declined to comment further.
Citic Capital declined to comment.
Carlyle, whose stake would not be affected by the transaction, did not respond to requests for comment.