RETAIL: McDonald’s, Coke Seek New China Partners in Changing Market

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Bottom line: McDonald’s is likely to choose a buyer for its China stores in the next 2 months, while China Foods’ decision to sell its stakes in several Coca-Cola bottling plants is probably a simple business decision that reflects changing priorities.

McDonald's near a sale of China stores
McDonald’s near a sale of China stores

Two western consumer giants are in the headlines of China’s rapidly shifting corporate landscape, led by word that the list of bidders vying to buy McDonald’s (NYSE: MCD) 1,650 China restaurants has been narrowed to 2. The other headline has one of Coca-Cola’s (NYSE: KO) top China business partners, China Foods (HKEx: 506), announcing its intent to dump its stake in several local bottling joint ventures.

Each of these stories illustrates the vital role that local partners play in the operations of foreign companies doing business in China. McDonald’s has largely owned and operated its thousands of China stores independently since entering the market in the early 1990s. But it wants to find one or more local partners to take over those operations as it moves to a more franchise-style model. Coca-Cola also uses a franchise model for the companies that bottle its trademark drinks that include Coke, as well as Sprite and many others.

The McDonald’s news has been in the headlines for much of this year, and is part of the fast food chain’s plans to make its operations in China, Hong Kong and South Korea more resemble its franchise business model in the US. That model allows McDonald’s to focus on marketing and new product development, while leaving the day-to-day operation of actual stores to local businessmen.

Earlier reports had indicated a wide range of companies were showing interest in the stores, ranging from conglomerate China Resources to the big state-owned China National Chemical Corp and the quirkier Sanpower, owner of some faded western retailers. Many of the big global private equity firms were also reportedly interested, including KKR, Bain, TPG, MBK and Carlyle.

After months of talks and bid submissions, the latest media reports indicate that Carlyle is one of just two companies still left in the bidding process. (English article; Chinese article) The other is an unspecified multinational group, with a final deal price likely of around $2 billion.

Unlikely Source

In an interesting twist, this report is coming from the New York Post, a gossipy newspaper that isn’t usually known for breaking big business stories. That means the source of the news is quite likely coming from Carlyle insiders in New York, and that bidding is winding down. Accordingly, we could finally see a deal announced sometime in the next 2 months, though it doesn’t look like any major Chinese firms will be among the winners.

Next there’s the Coke deal, which has China Foods reportedly exploring a sale of its stake in 10 bottling ventures throughout China through a tender offer. (English article) China Foods is a unit of Cofco, China’s largest grains company, which is itself in the process of a major restructuring. So perhaps the sale of the Coke bottling ventures is designed to raise some cash for Cofco’s own overhaul.

China Foods said it will sell stakes of anywhere from 7.15 percent to 100 percent in the various bottling plants, some of which are jointly owned with Hong Kong’s Swire Pacific (HKEx: 19). China Foods operates Coca-Cola bottling businesses in 15 provinces, most of them in North China. By comparison, Swire is more active in Southern China, leading some to say it might be a logical buyer for the China Foods assets now being sold.

This kind of sale is relatively common in China, where local business partners of big multinationals are constantly reevaluating their positions in the changing economic landscape. We saw Walmart (NYSE: WMT) get similarly dumped by one of its China partners, China Resources, about a year ago (previous post), and this latest sale is probably a similar business decision caused by changing priorities at China Foods and Cofco.

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