{"id":36990,"date":"2023-07-17T21:07:24","date_gmt":"2023-07-18T01:07:24","guid":{"rendered":"https:\/\/ifintechworld.com\/news\/mcdonalds-china-owners-seek-fresh-funds-to-support-golden-arches-expansion\/"},"modified":"2023-07-17T21:07:26","modified_gmt":"2023-07-18T01:07:26","slug":"mcdonalds-china-owners-seek-fresh-funds-to-support-golden-arches-expansion","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=36990","title":{"rendered":"McDonald\u2019s China Owners Seek Fresh Funds To Support Golden Arches Expansion"},"content":{"rendered":"
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When the Carlyle Group (CG), Citic Ltd. (0267.HK), and Citic Capital Holdings agreed to buy, operate and manage McDonald\u2019s Corp.\u2019s (NYSE:MCD<\/span>) massive China and Hong Kong restaurant network in 2017, they held out big hopes for ramping up the Golden Arches\u2019 presence in one of the world\u2019s fastest-growing consumer markets.<\/span><\/p>\n

Now, that partnership is showing signs of cooling, following reports last week that Carlyle and the two Citic entities were looking to sell down their stakes in McDonald\u2019s largest franchisee outside the U.S. The step isn\u2019t completely unexpected in the current climate, but still marks a sharp departure from the early great expectations expressed by both sides.<\/p>\n

The partnership represented one of Carlyle\u2019s biggest deals in China when it was first announced, demonstrating the U.S. private equity giant\u2019s \u201cconfidence in the strength of the Chinese consumer,\u201d Carlyle managing director X.D. Yang said at the time. McDonald\u2019s dished out an equally big serving of hype. CEO Steve Easterbrook, the company\u2019s CEO at the time, pointed out that China would soon become the company\u2019s largest market outside of the U.S., and would now have a super-sized Sino-U.S. franchisee as its main partner in the market.<\/span><\/p>\n

But five years later the market hasn\u2019t been quite as hot as expected, chilled by three years of tough Covid restrictions. Those troubling times have caused a partnership that once seemed rock-solid to show signs of cracks, which were evident in last week\u2019s reports that Carlyle and Citic Capital were seeking a partial exit.<\/p>\n

The move may look like an unravelling alliance on the surface. But it more likely reflects the difficulty China-focused dollar funds are facing exiting their investment in the current sluggish IPO market, as well as difficulties created by heightened geopolitical tensions. China\u2019s sluggish economy isn\u2019t helping either.<\/p>\n

Carlyle and Trustar Capital, Citic Capital\u2019s private equity affiliate, are setting up a new vehicle to execute their planned partial exit, Bloomberg News reported. Singapore\u2019s GIC Pte and Abu Dhabi\u2019s Mubadala Investment sovereign wealth fund were approached about becoming potential new investors, the report said.<\/p>\n

McDonald\u2019s China told Reuters that the partnership\u2019s shareholding structure will not change. Carlyle currently owns 28% of the McDonald\u2019s restaurant business in China and Hong Kong, while Trustar owns 42%. Citic Ltd. owns 10%, and McDonald\u2019s owns the remaining 20%.<\/p>\n

Rolling over assets into a new investment entity \u2013 typically called a continuation fund \u2013 has become a popular way for existing investors to cash out some or all of their holdings as global IPO markets cool. Global private equity secondaries \u2013 transactions where an investor sells an interest in an existing private equity investment to new investors \u2013 totaled $102 billion in 2022, the second-highest value on record, according to consultancy Zerone.<\/p>\n

Exit strategy<\/strong><\/h2>\n

Carlyle made its 2017 investment in McDonald\u2019s China from its Carlyle Asia Partners IV fund, a $3.9 billion fund that closed its fundraising in 2014. Citic Capital\u2019s investment came from a fund that began investing in 2017. That means both the Carlyle and Citic funds are now facing rising pressure to cash out of their investments and return the profits to the funds\u2019 contributors, also called limited partners.<\/p>\n

China-focused dollar funds are also now facing new challenges due to Sino-U.S. tensions, as well as from Ukraine\u2019s conflict with Russia, which China counts as a partner. Those factors have led many western funds that might normally be interested in a deal like the one being offered by Carlyle and Citic to increasingly shun such China investments.<\/p>\n

Carlyle and Trustar are reportedly seeking to raise $4 billion in their latest deal, which would value the entire McDonald\u2019s China restaurant business at up to $10 billion, including debt, according to the Bloomberg report. That would mark a huge increase from the $2 billion the business was valued at when the strategic partnership was formed in 2017.<\/p>\n

That surge likely reflects heavy investment in McDonald\u2019s China business \u2013 including debt financing \u2013 after the partnership launched its \u201cVision 2022\u201d plan shortly after the landmark deal. That blueprint set a target of 4,500 McDonald\u2019s restaurants in China by the end 2022, nearly double the 2,500 when the partnership was signed. McDonald\u2019s currently has 5,400 stores in China.<\/p>\n

While the partnership didn\u2019t slow its rate of new store openings during the pandemic, strict Covid restrictions hit McDonald\u2019s profitability in the country. McDonald\u2019s doesn\u2019t disclose performance of businesses where it holds a minority stake. But it revealed in its 2022 annual report that earnings from China dropped as a result of Covid restrictions.<\/p>\n

Citic Ltd. disclosed in 2020 that McDonald\u2019s China provided more than 60,000 free meals to frontline medical workers at the height of the pandemic, and the chain also provided delivery meal service for 1,500 hospitals.<\/p>\n

The fresh capital raising also reflects the need for ammunition in McDonalds\u2019 brutal battle with Yum China (YUMC; 9987.HK), China\u2019s largest fast food company, which operates the KFC and Pizza Hut brands in China. KFC is by far China\u2019s biggest fast-food chain with 4.9% of the market, or nearly double the 2.7% for McDonald\u2019s, according to consultancy Horizon Insights.<\/p>\n

Yum China owned 12,947 restaurants across China at the end of last year, including 9,094 KFCs, with plans to add up to 1,300 new stores this year. The company is targeting 20,000 stores in the country over the medium term. By comparison, McDonald\u2019s is aiming to roughly double its current store count in China to around 10,000 as a \u201cfuture milestone.\u201d<\/p>\n

Yum China\u2019s status as a dual-listed company in both New York and Hong Kong also gives it an edge over McDonald\u2019s China operations by making fundraising easier as it ramps up its expansion in China\u2019s smaller cities. Yum China\u2019s backers include the likes of global money managers Invesco and BlackRock, which are both stakeholders in the company.<\/p>\n

A more immediate threat for both McDonald\u2019s and Yum China is China\u2019s flagging economic recovery. Indicators involving consumption, investment and exports have all pointed to a gloomy picture in recent months. At the same time, the unemployment rate for youth \u2013 typically some of the biggest fast food customers \u2013 is now around 20% and may worsen.<\/p>\n

\u201cI have often stressed that the true indicator of economic growth is the increase in jobs and payroll, as they are fundamental to domestic consumption,\u201d Citic Capital Chairman Zhang Yichen warned in a letter to shareholders in 2020. \u201cWhen they are severely impacted, future consumption and growth will slow down significantly.\u201d<\/p>\n

Disclosure:<\/strong> None.<\/p>\n

Original Post<\/p>\n<\/div>\n

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When the Carlyle Group (CG), Citic Ltd. (0267.HK), and Citic Capital Holdings agreed to buy, operate and manage McDonald\u2019s Corp.\u2019s (NYSE:MCD) massive China and Hong Kong restaurant network in 2017, they held out big hopes for ramping up the Golden Arches\u2019 presence in one of the world\u2019s fastest-growing consumer markets. Now, that partnership is showing […]<\/p>\n","protected":false},"author":1,"featured_media":36991,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"gallery","meta":{"footnotes":""},"categories":[236],"tags":[83],"class_list":["post-36990","post","type-post","status-publish","format-gallery","has-post-thumbnail","hentry","category-news","tag-featured","post_format-post-format-gallery"],"yoast_head":"\nMcDonald\u2019s China Owners Seek Fresh Funds To Support Golden Arches Expansion | iFintechWorld<\/title>\n<meta name=\"description\" content=\"When the Carlyle Group (CG), Citic Ltd. 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