Activist investors pushing McDonald’s to spin off its real estate assets are not loving its decision to keep its vast holdings. Long-term shareholders should be happier.
The decision to forgo a one-time windfall in favor of keeping some of the company's most precious assets in its arsenal suggests new CEO Steve Easterbrook might just plan to run the company for the long haul, rather than satisfying the market's short-term demands.
McDonald's rents out most of its stores to its franchisees, so its properties provide a steady flow of cash Easterbrook can use to help propel a nascent turnaround. Ownership gives McDonald's greater control over its franchisees and, more importantly, creates an insurance policy should the company ever need to raise more cash in a hurry.
To be sure, Easterbrook is no Jeff Bezos. He has nowhere near the leeway Amazon commands from Wall Street and knows he has to increase sales and profits at the struggling fast-food chain. The activists will continue to circle. McDonald's did throw them a bone. The company said it would borrow a "meaningful amount" of money, dinging its debt rating, to return an additional $10 billion to shareholders by the end of next year. It also pledged to shave annual overhead expenses by $500 million and raise its quarterly dividend by 5 percent.
Most significantly, McDonald's said it would alter the way it runs its business by increasing the percentage of franchised locations to 93 percent by the end of 2018 from 81 percent. The process, called refranchising, lets the company transfer the costs of running its own locations to franchisees who pay royalties based on sales of burgers and fries. The move mirrors actions taken by Restaurant Brands International, which now franchises nearly all its Burger King and Tim Hortons stores, and has transformed itself into more of a marketing company than a restaurant operator.
With ownership of 45 percent of the land and 70 percent of the buildings in its 36,000-store chain, McDonald’s remains an anomaly among its peers. (By contrast, Burger King and Yum Brands own fewer than 1 percent of their properties). And certainly there could come a time when it makes sense for McDonald's to spin out its real estate -- which could be worth $20 billion to $40 billion, according to various estimates.
But for now, with the economy barreling forward and turnaround plans taking shape, it's best for the Golden Arches to keep that chip in its pocket.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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