Carlyle, CITIC buy McDonald’s China for $2bn

An investor consortium which includes The Carlyle Group, Chinese conglomerate CITIC Limited and its investment unit CITIC Capital Holdings has bought the Hong Kong and China businesses of McDonald’s for $2.08 billion, sister publication Private Equity International reported.

CITIC Limited and CITIC Capital will have a combined 52 percent interest in the Chinese operations, while Carlyle will have a 28 percent stake. McDonald’s will continue to own 20 percent following the deal, according to a joint statement.

The transaction, which will be settled in cash and new shares in the company, includes franchising rights for 20 years. The deal is expected to be completed by mid-2017.

Global buyout firms Bain Capital and TPG are said to have participated in the earlier bidding rounds for McDonald’s. China Cinda Asset Management, Beijing Tourism Group and private Chinese technology and real estate firm Sanpower Group were also reportedly involved in earlier bids for the company.

Carlyle’s investment came from Carlyle Asia Partners IV, a 2013-vintage $3.9 billion vehicle, that makes control and significant minority investments in companies across Asia, excluding Japan.

Meanwhile, CITIC structured the deal through its China-focused private equity fund CITIC Capital China Partners III which is targeting $1.5 billion, according to an announcement from Hong Kong Exchanges and Clearing (HKEX).

Carlyle and CITIC intend to deepen their exposure to China’s burgeoning consumer sector. Chang Zhenming, chairman of CITIC Limited, commented: “This is also a strategic opportunity for CITIC to invest in the expanding Chinese consumer sector. McDonald’s extensive network and consumer base will provide us with invaluable insights, which we will leverage to the benefit of our existing businesses.”

Carlyle and CITIC’s investment will be used to open more McDonald’s restaurants in tier three and four cities in China, to innovate its fast-food menu, as well as to improve delivery services. McDonald’s said it intends to add more than 1,500 restaurants in mainland China and Hong Kong over the next five years.

Upon completion of the transaction, Yichen Zhang, chairman and CEO of CITIC Capital will serve as chairman of the board of the new company, while X.D. Yang, managing director and co-head of the Carlyle Asia’s buyout team will serve as vice chairman.

The sale process was not without controversy. When McDonald’s announced in May last year its global restructuring efforts to streamline its franchising model, the Service Employees International Union (SEIU), a US labor union, started conducting research on risks associated with the potential deal to franchise partners and ultimately McDonald’s workers in Asia.

In June the SEIU sent out letters to investors and bidders of the Asia business warning them of the risk associated with the potential acquisition. “We believe McDonald’s past practices pose risks for its future licensees, those firms’ investors, McDonald’s franchisees in Asia and the workers employed at McDonald’s stores,” SEIU executive vice president Scott Courtney wrote in the letter.

Courtney added in an email response to Private Equity International: “Reversing poor brand perception requires long-term investment, and McDonald’s decision to radically restructure its relationship with franchisees and reduce its own involvement in so many Asian markets may indicate its desire to shift much of the financial risk to outside parties.”

CITIC and Carlyle however emphasized in their joint statement that they will “devote themselves to continue upholding McDonald’s extremely high standards of food quality and service.”