McDonald's gets first bids for 2,300 outlets in China and Hong Kong

McDonald’s has received more than half a dozen bids for its China and Hong Kong stores, including offers from Beijing Tourism Group, Sanpower and ChemChina, in an auction that could fetch up to US$3 billion.

Sanpower Group, a technology and real estate firm, said it has submitted a joint bid with Beijing Tourism Group for the stores.

Buyout firms including Bain Capital, TPG Capital and Carlyle Group are also participating in the auction with a view to teaming up with Chinese strategic bidders, people familiar with the plans said.

The US fast-food company announced in March it was reorganising its Asian operations by bringing in partners who would own the restaurants within a franchise business. Its competitor Yum Brands is also restructuring its China business by spinning it off ahead of a likely IPO next year.

The planned sale of China units by McDonald’s and Yum indicates they are seeking local partners who could help to ward off growing competition from domestic rivals and also better manage public perception in the wake of food-safety scares that hit the two fast-food giants in the last few years.

“Given the difficulties Western chains have had recently with public perception, local players have become a serious competitive threat,” said Elizabeth Friend, a consumer foodservice analyst at Euromonitor International.

McDonald’s has hired Morgan Stanley to run the sale of about 2,800 restaurants in China, Hong Kong and South Korea, Reuters previously reported. The sale in South Korea is being run separately and it is not known if the same parties have expressed interest in that sale.

As part of the deal, McDonald’s is offering a 20-year master franchise agreement to buyers, with an option to extend it by another 10 years.

It has stipulated that private equity firms remain a minority partner in any bidding consortium, restrictions that discouraged some buyout funds from participating in the auction, the people added.

Among those who were preparing to place first-round bids ahead of the June 20 deadline were Beijing Capital Agribusiness Group, which is McDonald’s current China partner, and GreenTree Hospitality, the people added. It was not immediately clear if those companies made the bids.

McDonald’s will now draw up a shortlist of bidders for the next round in the coming weeks.

The privately held Beijing Tourism did not respond to a fresh Reuters request for comment on Thursday.

Officials at ChemChina, formally known as China National Chemical Corp, were not available to comment. An official at Beijing Capital Agribusiness said the company did not participate in the bidding. A spokeswoman for GreenTree said the company was not bidding currently.

Bain, Carlyle and TPG declined to comment. The sources declined to be identified as the sale process is confidential.

A McDonald’s spokeswoman said the company was “making progress” in the sale process. “As no decisions have been made, it would be premature to speculate further,” she said.

McDonald’s does not break out country-by-country revenue details but industry data shows it is China’s second-biggest fast-food chain behind Yum, which operates the KFC and Pizza Hut chains.

McDonald’s China and Hong Kong business posted about $200 million in earnings before interest, tax, depreciation and amortisation for fiscal 2016, and could be sold for about 15 to 16 times its core earnings, taking the deal value to about $3bn.

But its earnings have been volatile and it made only $65m for 2015, which is likely to weigh on how some of the suitors could value the business, the people added. Some sources said the sale is likely to fetch around $2bn.

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