CTPCY CITIC Ltd (PK)

By Kane Wu, P.R. Venkat and Julie Steinberg 

A consortium including private-equity giant Carlyle Group LP is close to a deal valued at as much as $2 billion to buy McDonald's Corp.'s China franchise, giving the U.S. fast-food chain operator cash and local help cracking the China market.

McDonald's is selling a roughly 80% stake in its China franchise to the Carlyle consortium, which also includes Chinese state-owned conglomerate Citic Ltd., according to people familiar with the situation. The proposed deal, which still needs a final signoff from the McDonald's board, could fetch the company an upfront payment of between $1.5 billion and $2 billion, the people said.

An announcement could be made as early as next week, the people said.

A McDonald's representative in China declined to comment.

The Oak Brook, Ill., chain has about 2,200 stores in China, about one-third of which are already franchised. All of the company's remaining China stores would be franchised under the deal, with McDonald's keeping a 20% stake in them. The move would likely help McDonald's trim its overall operational costs and preserve capital.

McDonald's also would rake in an estimated 5% to 7% of the China franchise sales for 20 years.

The company's monthslong auction of its China franchise attracted interest from private-equity firms TPG and Bain Capital LLC, teaming up with local partners, and a handful of local competitors bidding on their own.

A deal also would let Citic and Carlyle build 1,300 stores in China and Hong Kong.

Sales from established McDonald's stores in China shrank after a supplier problem led to shortages of hamburgers and chicken at some restaurants in 2014, according to figures provided on the company's earnings calls. Although sales in the country began recovering in the middle of last year, they shrank again in the most recent quarter because of "protests surrounding recent events related to the South China Sea," McDonald's Chief Executive Steve Easterbrook said on a recent earnings call.

The fast-food brand still has room to grow in China, the only major market where the number of Kentucky Fried Chicken stores -- 5,000 and counting -- outstrips the number of McDonald's stores. But the novelty of burgers, fries and shakes has long since faded in the world's second-largest economy. The consortium will need to find new ways to satisfy Chinese consumers demanding healthier, personalized and more upscale alternatives.

In a similar move, fast-food rival Yum Brands Inc. said earlier this year it would split off its KFC and Pizza Hut operations in China and maintain a foothold in the country through royalty payments. It struck a deal in September to sell a combined $460 million stake in the China operations to Chinese private-equity fund Primavera Capital, run by former Goldman Sachs Group Inc. Greater China Chairman Fred Hu, and Ant Financial Services Group, the financial affiliate of Chinese internet giant Alibaba Group Holding Ltd.

The McDonald's deal would be state-owned conglomerate Citic Ltd.'s first foray into the restaurant business. The group runs a number of companies in the financial, real-estate, national-resources and energy sectors. It owns China's seventh-largest lender by assets, China Citic Bank, and the country's leading investment bank, Citic Securities Co., as well as energy company Citic Resources Holdings Ltd. and metals manufacturer Citic Pacific Ltd.

Carlyle, based in Washington, is no stranger to China's consumer sector. It bought a majority stake in Shanghai-based Italian restaurant chain Babela Restaurant Management Co. in 2007 and sold it to an Asia-based private capital fund in 2012.

It has also invested in hotel chains and a packaged-food company in China. The majority of the companies in Carlyle's growth portfolio are in China, its website shows.

--Wayne Ma contributed to this article.

Write to Kane Wu at Kane.Wu@wsj.com, P.R. Venkat at venkat.pr@wsj.com and Julie Steinberg at julie.steinberg@wsj.com

(END) Dow Jones Newswires

December 07, 2016 02:48 ET (07:48 GMT)

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