Carlyle teams up with Korean dairy to buy McDonald’s local unit

Sep 01, 2016 (Gmt+09:00)

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The Carlyle Group has joined forces with a local dairy to bid for the South Korean operations of McDonald’s in a deal reportedly worth 600 billion won ($535 million), as the U.S. private equity firm is also vying for the fast food chain’s stores in China and Hong Kong, according to investment banking sources on August 31.

Maeil Dairy Industry Co., a South Korean milk product maker and restaurant operator, has recently entered the race in consortium with Carlyle to buy the South Korean unit of the fast food giant, and expressed its interest to the selling side, those sources said. Maeil hired J.P. Morgan as its advisor for the auction. J.P. Morgan is also advising Carlyle on the deal.

“Initially, Maeil Dairy had considered participating in the auction on its own,” one of the IB sources told the Korea Economic Daily. “It seems that Maeil has decided to join forces with Carlyle because of J.P. Morgan’s suggestion.”

Industry watchers say that the Carlyle-Maeil consortium will place them in an advantageous position over two other bidders – a local consortium of a gaming and online payment services provider and a holding company of a mobile transaction firm, and a top food and entertainment conglomerate. McDonald’s appears to prefer to sell its 2,800-odd stores in China, Hong Kong and South Korea in a package deal, those sources added.

The Carlyle Group is one of the two final suitors for McDonald’s restaurants in China which is likely to fetch more than $2 billion, New York Post reported on August 22, citing two unnamed sources.

In the South Korean auction, KG Group, the holding company of a domestic mobile transaction firm, is teaming up with NHN Entertainment Corp., a gaming and online payment company to place a joint bid for the food chain. On August 25, NHN Entertainment said in a regulatory filing that due diligence is underway on McDonald’s Korean operations, without elaborating further. CJ Corp. also said in late July that its parent group had submitted a preliminary bid and was conducting due diligence on McDonald’s South Korean unit.

McDonald’s is expected to receive final bids for the South Korean stores as early as later this month.

FOOD INDUSTRY BUOYS M&A MARKET

The U.S. hamburger chain wants to turn the units in China, Hong Kong and South Korea into a franchise to receive a franchise payment and ongoing royalty fees. The sale processes for those units are being run separately.

In South Korea, Carlyle also has made its way to a shortlist of a coffee franchise, Hollys Coffee, which a domestic private investment firm put up for sale, according to investment banking sources on August 30. The U.S. private equity house is competing with two unidentified South Korean companies and a domestic private equity firm for the coffee chain. The shortlisted preliminary bidders are known to have offered slightly over 200 billion won for the prospective purchase.

Food and restaurant chains have been leading the M&A market in South Korea, and private equity firms emerged as aggressive bidders. Despite intense competition and falling profits at fast food and family restaurants, their stable cash flows and less sensitivity to economic cycles compared with manufacturing businesses seem to make them attractive targets, industry watchers say.

Earlier this year, Hong Kong-based Affinity Equity Partners acquired Burger King’s South Korean operations for about 210 billion won from a domestic private equity firm.

For Maeil Dairy, its restaurant business, including Italian and Chinese food chains and coffee franchise Paul Bassett, has been gaining ground. “Maeil Dairy’s experience and Carlyle’s funding capability make them a strong candidate,” said another IB source.

In 2014, McDonald’s Korean operations reportedly saw its net profit tumbling to 4.1 billion won, about a seventh of its previous earnings.

The Carlyle Group has been actively participating in South Korea's M&A market. After the acquisition of a security company, ADT Korea, for $1.9 billion from Tyco Fire & Security Services in 2014, Carlyle has recently joined the bids for the country's No.4 parcel delivery firm, Logen Co. Ltd., competing with CVC Capital Partners and Affinity Equity.

By Chang Jae Yoo and Soram Jung

yoocool@hankyung.com