McDonald’s (NYSE:MCD) Sells China, HK Business for $2.1 Billion

The mega food retail business McDonald’s (NYSE:MCD) has disclosed they are selling most of their China business in a deal that could be worth $2.1 billion. With this, McDonald’s is almost completely ending their three-decade long operations in China.

Chinese state-owned conglomerate Citic is said to be buying McDonald’s business stake in the country. Citic is among the largest state-owned businesses in the country. Their investment management unit Citic Capital will be picking up 52 percent in the business. The Carlyle Group from Washington will own about 28 percent. McDonald’s has decided to keep the remaining 20 percent.

The agreement will stand for 20 years, and McDonald’s Corporation will receive both new shares and cash. However, regulators will have to approve this deal first. The deal is expected to be completed by the middle of 2017 once the approval is received.

McDonald’s China Move to Trim Costs and Preserve Capital

There are close to 2200 McDonald’s stores in China and Hong Kong, and about a third of them are franchised already. According to the agreement, the other remaining stores are going to be also franchised now. Plus, 1300 more stores are going to be opened soon in Hong Kong and China. McDonald’s will make anything between 5 percent and 7 percent from the sales of these franchisees.

The experts are saying that it’s a good move, as it will help McDonald’s preserve capital and trim their overall capital costs.

China has not been a happy market for many western food businesses. For instance, Golden Arches has been struggling to improve their sales in recent years. Golden Arches comes in second in the country behind Yum China Holdings that operates more than 2000 Pizza Hut and 5000 KFC stores. Sales in McDonald’s stores have shrunk as well following a problem with suppliers in 2004 that caused a shortage of chicken and hamburgers. McDonald’s could never recover from this.

Sales Recover Briefly, Only To Fall Again

Steve Easterbrook, the Chief Executive revealed that sales did start to pick up again around the middle of 2015, but they have decreased again in the last quarter after the South China Sea troubles erupted, and there were widespread protests.

There is growing local competition to McDonald’s (NYSE:MCD) as well from businesses such as Dicos from Taiwan, whose chicken sandwiches are sold from more than 2000 restaurants. There is Real Kung Fu too that sells noodles bowls with pork and beef.