McDonald’s struggles to attract bidders for China franchises

CN China

McDonald’s struggles to attract bidders for China franchises

McDonald’s is struggling to attract the calibre of bidders it envisioned in the sale of its China and Hong Kong franchise, according to people familiar with the situation. With the auction, announced earlier this year, the company is seeking to reduce its direct exposure to China, where food supply scandals have hurt its share price, and to halt capital expenditure in the region.

But McDonald’s is also looking to fortify its reputation with the sale, which has moved into a second round of bidding and could fetch $2bn-$3bn, according to people briefed on the deal. Pressure from investors for better quality control in Asia has been reflected in the terms of the deal, said these people, who say some of the conditions, such as keeping management intact for two years and a restriction on taking the franchise public, are onerous.

“They aren’t getting the top-tier companies they wanted. They have had to turn down a lot of the [unqualified] bidders,” one person briefed on the auction said. McDonald’s said: “We are making solid progress as we look for long-term strategic partners with local relevance who have complementary skills and expertise.” The shortlist includes some Chinese groups that have shot to fame after aggressive buying sprees but have little to no experience in fast food.

Sanpower Group, which has struggled to manage the UK‘s House of Fraser department store after buying it in 2014, said it had made an offer in partnership with state-owned Beijing Tourism Group. State-owned ChemChina, which agreed in February to pay $44bn for Swiss agrochemical company Syngenta and owns a chain of noodle shops in China, was also an early bidder, though it is unclear if the company has made it into the next round.

China Cinda Asset Management, a state-owned bad-debt manager, and dairy company Beijing Sanyuan Foods have also lodged bids, Bloomberg has reported.

McDonald’s share price has risen more than 23 per cent over the past 12 months, since Steve Easterbrook took the reins and outlined a turnround effort. The plan for Asia involved one or more local partners taking over the China and Hong Kong franchise of 2,800 outlets for 20 years while paying royalties to McDonald’s.

But some investors are uneasy about handing over the franchise and McDonald’s brand reputation to a Chinese group, particularly after a food safety scandal there in 2014 that hit sales. “There has always been a massive disconnect between what is happening here and what the company in the US thinks is going on,” said Ben Cavender, principal at China Market Research, which advises multinational chain restaurants in China.

Dieter Waizenegger, executive director of CtW Group, which is affiliated with a federation of unions holding more than $250bn in assets including 0.2 per cent of McDonald's, wrote a letter to the company in March expressing concern about the idea of an master franchising strategy for Asia. CtW said the royalties McDonald’s receives from the owner of its Latin America franchise, Arcos Dorados, have declined 23 per cent over the past two years.

“Our concern is that if McDonald’s attempts to replicate the master franchisee model it has established with Arcos Dorados in other regions, it will replicate the poor performance and absent accountability currently plaguing that company,” Mr Waizenegger wrote.

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