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Buyout Firms being Targeted by McDonald’s for Sale of its North Asia Stores

Buyout Firms being Targeted by McDonald’s for Sale of its North Asia Stores

For its planned sale of 2,800 restaurants in North Asia, McDonald's Corp is targeting private equity firms, including Bain Capital, MBK Partners, TPG Capital Management and Chinese state-backed conglomerate China Resources (Holdings) reported Reuters citing sources.
By planning to bring in partners to own the restaurants within a franchise operation, the U.S. fast food giant is adopting a new business model in Asia. It is now the most intense battleground for global restaurant chains.
The company said in a statement on March 31 that McDonald's has set a long-term aim of being 95 percent franchised like several other global restaurant operators who have switched to the so-called franchise model.
Sources were quoted by Reuters as saying that Morgan Stanley has been hired to run the sale of the restaurants in China, Hong Kong and South Korea by the Oak Brook, Illinois-based McDonald's.
A list of likely partners who will be approached to participate in the auction is being drawn up by the company ahead of that, sources said.
The franchise partners would be responsible for future capital spending and would likely end up owning a majority stake in the restaurants in each market, or even as much as 100 percent. Sources said that the precise structure of the deal is still to be decided. In return, McDonald's will get ongoing royalty fees, which usually range between 3-5 percent of annual turnover and a one-time franchise payment.
 Banking sources familiar with the process said that Asia-focused Baring Private Equity Asia is the other buyouts firm likely to be invited to the auction process.
There were no reaction by McDonald's China Resources, MBK, Bain, TPG and Baring all and Morgan Stanley.
McDonald's is China's No. 2 fast food chain behind YUM Brands Inc, which operates the KFC and Pizza Hut chains even though the company does not break out country-by-country revenue details.
McDonald's would likely offer a majority stake to make the deal appealing to buyers and is leaning towards finding separate partners in all the three markets said sources.
The rapid growth opportunity available in the so-called quick-service restaurants' (QSR) business in Asia has attracted private equity firms.
"In recent years, even though formal dining may have been impacted by the austerity measures, QSR as a format is growing pretty rapidly. QSR has the format that a lot of investors like because of the growth of the segment, standardized procedures and it's easy to expand," said Kiki Yang, a Greater China partner at consulting firm Bain & Co.
Earlier interests of expanding their retail footprint have been expressed by China Resources (Holdings), which is the parent of brewing company China Resources Beer Holdings, and operates Pacific Coffee chains in Hong Kong, China, Singapore and Macau.
"This will attract a lot of sponsor interest. For one, it's an established business and second such assets rarely come to market in Asia," said one senior Hong Kong-based M&A banker familiar with the McDonald's process, reports Reuters.

Christopher J. Mitchell

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