Why McDonald’s pays more to buy its china franchise stake back

November 22, 2023 11:32
Photo: Reuters

Spare a thought for McDonald’s shareholders who may have wondered how its business is doing in China.

The world’s No.1 burger shop paid US$1.8 billion to raise its stake in its China joint venture to 48 per cent from 20 per cent earlier this week, days after Chinese President Xi Jinping met United States President Joe Biden at the APEC meeting.

On Monday, McDonald’s chief executive officer Chris Kempczinski said, "We believe there is no better time to simplify our structure, given the tremendous opportunity to capture increased demand and further benefit from our fastest growing market's long-term potential."

Private equity firm Carlyle Group, which sold the 28 per cent stake it acquired in January 2017 back to McDonald’s must be smiling on way to the banks.

Carlyle, which was said to make a return of six times its investment, was part of the consortium with major investor Citic to acquire McDonald’s China in a deal worth US$2.08 billion.

McDonald’s sold 80 percent of its fast food business in Hong Kong and China in the deal completed in August 2017, while retaining a stake of 20 per cent.

As such, McDonald’s is paying almost the same amount of money it got from selling an 80 percent stake in its China franchise six years ago, for a 28 percent stake this time.

Of course, McDonald’s China, now its second-largest market, is now a different story. The franchise now owns 5,400 stores, double the then 2,700 stores when it sold a majority stake.

Based on its current plan, McDonald’s outlets will hit over 10,000 by 2028.

Why McDonald’s changed its heart at this time when many global enterprises are running away from China?

One explanation according to Hong Kong Economic Journal was because the incumbent chief executive Kempczinski, who took over from predecessor Steve Easterbrook in 2019, sees better prospects in China.

Anyway, no matter how uncertain the US-China relations might be, it does not seem to dampen mainlanders’ insatiable appetite for burgers.

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EJ Insight writer