By Wayne Ma and Kane Wu

McDonald's Corp. has reached a deal to sell a controlling stake in its China operations to an investor group led by Citic Ltd., one of China's largest state-owned companies.

Citic Capital Holdings and private-equity giant Carlyle Group will buy an 80% stake in the fast-food giant's China business in a deal that values the operation at up to $2.08 billion. The agreement is for 20 years.

Citic Capital, the financial arm of the conglomerate, will have a majority stake of 52%. Carlyle will have a 28% stake.

McDonald's has about 2,200 stores in China, about one-third of which are already franchised. All of the company's remaining China stores would be franchised under the deal, with McDonald's keeping a 20% stake in them. The move would likely help McDonald's trim its overall operational costs and preserve capital.

The move comes as the Golden Arches has struggled in recent years to lift sales in China, where it is the No. 2 western fast-food chain behind Yum China Holdings, which has more than 5,000 KFCs and nearly 2,000 Pizza Huts. Sales from established McDonald's stores in China shrank after a supplier problem led to shortages of hamburgers and chicken at some restaurants in 2014, according to figures provided on the company's earnings calls.Although sales in the country began recovering in the middle of 2015, they shrank again in the most recent quarter because of protests related to U.S. opposition of China's territorial claims to the South China Sea, McDonald's Chief Executive Steve Easterbrook said on a recent earnings call.

Many restaurant brands have been moving to a so-called asset-light structure in which they own the brands but not the actual restaurants. The model allows restaurant companies to shoulder less risk and volatility because they can collect a stable revenue stream in the form of a percentage of franchisees' sales.

Carlyle and Citic will build an additional 1,300 stores in China and Hong Kong as part of the deal agreement, people familiar with the matter said. McDonald's also would rake in an estimated 5% to 7% of the China franchise sales, the people said.

McDonald's entered China in the early 1990s and was the first Western dining experience for many Chinese consumers. That experience, however, has changed as Chinese consumers have started to demand healthier, more upscale and personalized alternatives.

Competition also is rising, with brands such as Dicos, a Taiwanese-owned chain, offering chicken sandwiches at more than 2,000 restaurants in China, and Real Kung Fu, which offers bowls of Chinese noodles with beef and pork.

A Chinese partner would help McDonald's expand beyond Beijing, Shanghai, Guangzhou and other metropolises to smaller cities, where partners have better knowledge of the country's real-estate and market demographics.

Write to Wayne Ma at wayne.ma@wsj.com and Kane Wu at Kane.Wu@wsj.com

(END) Dow Jones Newswires

January 09, 2017 00:19 ET (05:19 GMT)

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