McDonald’s Corp. (NYSE: MCD) has made a deal to buy out one of its joint venture partners in its operations in China. It has taken over a 28% stake owned by private equity firm Carlyle. The arrangement puts McDonald’s ownership level at 48%, which effectively gives it control of the business. The transaction values the entire business at $6 billion.
The valuation seems low, given the expansion potential in the world’s largest country by population. CEO Chris Kempczinski approved the deal because his company wants to “further benefit from our fastest growing market’s long-term potential.”
McDonald’s has about 40,000 stores in the world. It has just over 13,000 locations in the United States. Its most successful overseas markets, by store count, are China, Japan and the United Kingdom. The U.S. expansion may be difficult. McDonald’s growth in America will be capped by saturation based on half a century of building store count. (See the most popular fast-food chains in all 50 states.)
McDonald’s in China
Source: Alst / Getty Images
China could supersize McDonald’s financial results. Despite its size, McDonald’s posted a revenue gain of 14% to $6.7 billion in the most recent quarter, and net income rose 17% to $2.3 billion. Its stock price will rely on continuing the pace of expansion. So far in 2003, that pace has been weak, up only 8.5% to about $298, while the S&P 500 is about 20% higher.
What are McDonald’s risks in China? They are probably geopolitical. The United States has started blocking some business transactions by American-owned businesses, particularly those that make advanced technologies. China could retaliate, which puts every U.S.-based company at some risk, even if it is not in the tech sector. McDonald’s could be on the list of targets.
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