November 1, 2005
BY ERIC HERMAN Business Reporter Advertisement
Eager to douse speculation, McDonald’s Corp. Chief Executive Jim Skinner sent a letter to franchisees saying the fast-food giant would not spin off its real estate holdings or its company-owned restaurants.
The move seemed a response to Pershing Square Capital Management, a hedge fund run by William Ackman. The fund had reportedly been pressuring Oak Brook-based McDonald’s to split up into two or three companies. Pershing Square held a 4.9 percent stake in McDonald’s in September, though it is not clear if it still does.
“We have no intention to undertake a large-scale restructuring either through a McOpCo spin- off or a Real Estate Investment Trust [REIT]. Neither would be in the best interest of our system or our shareholders,” Skinner wrote.
Franchisees own about 75 percent of McDonald’s restaurants. But McDonald’s owns their buildings and, often, the land on which the restaurants sit. The company makes money by collecting rent and other fees from the franchisees.
Click here for latest stock quoteMcDonald’s also owns about 25 percent of the restaurants—collectively known as McOpCo.
After rising 32 percent in 2004, McDonald’s shares have treaded water this year, slipping one percent to date, and closing Monday down 69 cents at $31.60.
In theory, spinning off the real estate or McOpCo could unlock value for shareholders. But according to Janna Sampson of OakBrook Investments, which owns 997,500 McDonald’s shares, owning the real estate is central to how the company operates.
“McDonald’s understands it’s key to their business not to spin off their real estate,” Sampson said.
“It’s part of the bigger package for McDonald’s in controlling what franchisees do,” Sampson said. “If they own your property, they have more leverage to make you comply.”
Pershing Square has a history of pressuring fast-food companies into taking action.
Earlier this year, the fund bought a stake in Wendy’s International, and forced the company to sell real estate and spin off its Tim Hortons unit.
Last week, McDonald’s announced a partial spinoff of its Chipotle restaurants.
Contributing: Bloomberg News