McD’s Says Thanks But No to Shareholder Proposal
By George Anderson
William Ackman thinks McDonald’s Corp. is “a very shareholder-friendly company,” and while he thinks its management is doing a good job, he has a few suggestions on how it could perform better for its shareholders.
McDonald’s CFO Matthew Paull said the company remains “open to ideas” but, following Mr. Ackman’s recommendations “would not create significant value for McDonald’s shareholders”
and would “pose serious strategic and financial risks” to the business.
Yesterday, Mr. Ackman, founder and managing partner of the hedge fund Pershing Square Capital Management, presented a proposal calling for McDonald’s to sell roughly two-thirds of its company-owned restaurants and borrow $14.7 billion against its real estate assets to buy back shares. Doing this, said Mr. Ackman, would help raise McDonald’s share price by up to 50 percent within six months. Pershing Square Capital Management holds a 4.9 percent stake in McDonald’s.
Mr. Ackman called the view of McDonald’s as a restaurant company that has large real estate holdings a “fundamental misperception.” The truth, he said, is nearly 90 percent of McDonald’s earnings, not including rent and some other fees, come from its real estate.
Shedding company-owned restaurants would get McDonald’s out of a low-margin and capital-intensive business and allow it to focus on its franchisee operations, he said.
Moderator’s Comment: Does running company-owned restaurants make McDonald’s a greater asset to its franchisees or would the needs of franchisees be better
served if it were to follow William Ackman’s recommendations? –
George Anderson – Moderator
McD’s is only doing what any publicly traded organization should do: considering their valuation in light of other options. Even considering this is a large move for any company, let alone one which is the gold standard in their industry. Change initiatives are not for everyone, but many times the value of a company is higher when measured by the value of its components rather than as a whole. Re-examining this is something which should be done to maximize shareholder value.
For those unfamiliar with franchise operations, it’s important to remember this rule: The parent company loses all credibility with franchisees if they don’t operate company-owned locations. McD’s in particular has tough, stringent rules and expectations that span everything from operations, to management, to menus, to marketing. How could they enforce these rules if they didn’t own a significant number of the stores? Handbooks and manuals don’t keep franchisees in line.
Mr. Ackman has only one interest – Cash! His interest is certainly not the best long term strategic plan for McD’s continued success. It’s simply cash – period.
While I am not sure McD’s strategic plan is the best, I remain convinced that shareholder meddling isn’t the direction any company should take. Mr. Ackman is an investor – period. He can invest or not. If he doesn’t like the results, my suggestion is to divest and find a better place to invest. That’s how it works. If you want to run a company, see the employment office. If you want to invest, see your broker. The two are mutually exclusive. I am sure there are many places for his dollars to achieve the return he desires – move on.
McDonald’s is in 3 businesses: (1) real estate; (2) franchising and; (3) restaurant management. As long as #2 is done skillfully, it pays to keep #1. If #3 has a greater return on investment than #1 and #2, it pays to keep it. Otherwise, it pays to keep the real estate and sell the company-owned restaurants, except for a few locations needed as training sites and customer research sites. As long as the tenants can pay their rent and franchise fees, if McDonald’s owns the land, its profits are annuities with minimal risk. Running restaurants is more aggravating and risky than #1 or #2, and takes more capital, but if McDonald’s can do it with a decent ROI, why not keep doing it? Most Wall Street investors are interested in short-term gains, not the long-term. Retailers who own their real estate are the longest-lived retail companies. I doubt that the hedge funds care if McDonald’s exists 20 years from now.
I always thought Pan Am should have sold the airline, not the building.
Funny how a hedge fund guy knows more about what the world’s leading restaurant company, with a long track record of success, should do than its own management supposedly does.
I’ve seen a trend in retail lately where companies will go out and borrow a ton of money so they can pay a big dividend back to shareholders. I still don’t understand how this is a good long term strategy. I suppose borrowing money to buy back stock in order to raise share price works the same way. I’ve never been a big fan of going into debt just to get a short term boost in dividends or share price. I think this guy is just trying to make headlines. You could apply this same strategy to just about any company. It’s not like McDonald’s has not given this a lot of thought over the past 50 years.