Fast-food chain aims to cut stake in Japan unit, echoing deals in China, Hong Kong

By Kane Wu and Julie Jargon

McDonald's Corp. is inviting bids for a significant stake in its Japan unit, according to people familiar with the situation, days after it reached a deal to sell its China and Hong Kong franchises.

The Oak Brook, Ill.-based fast-food giant owns through subsidiaries just under 50% of the unit, which is listed on the Tokyo Stock Exchange and has a market capitalization of around $3.5 billion. McDonald's is looking to sell up to 33% of the unit, with bids due next week, the people said. A number of private-equity firms are considering bids, they said. Morgan Stanley is running the sale, one of the people said. The bank didn't reply to queries on the deal.

A spokesman for McDonald's said the company is continuing to explore a potential sale of a portion of its ownership in McDonald's Japan but that no decisions have been made at this time.

McDonald's move to trim its stake in its Japan unit follows an announcement earlier in the week that it is selling an 80% stake in its China operations, valued at an estimated $2 billion, as fast-food operators throughout the world dump assets and focus on managing their brands. The model lets companies collect a piece of sales without the costs and headache of managing hundreds of stores.

McDonald's first signaled plans to sell a stake in the Japan business last year, with Chief Financial Officer Kevin Ozan saying the company was looking for "a strategic investor who could help advance Japan's turnaround efforts."

The search for bidders initially started a year ago, but stalled after a few interested parties balked at the price McDonald's was asking, according to two people familiar with the matter.

Shares of McDonald's Holdings Co. (Japan) Ltd. are up 19% since a year ago.

McDonald's has long-term plans to franchise 95% of its stores and is looking to do a similar sale in South Korea, its chief executive Steve Easterbrook said in an earlier interview. Since the beginning of 2015, McDonald's has sold nearly 1,000 of its restaurants to franchisees, the company said in October. In December, it sold its nearly 400 stores in Malaysia and Singapore -- 80% of which were company-owned -- to a Saudi investment group. McDonald's said it is on track to convert about 4,000 company-owned restaurants to franchises by the end of 2018.

McDonald's business in Japan has struggled in recent years, in part due to news of food-quality problems. A Chinese supplier was accused of selling expired meat across Asia, prompting McDonald's Japan to stop selling all chicken produced in China and switch to Thai chicken. The Japan business posted a Yen21.84 billion ($189.1 million) loss in 2014, its first annual loss in 11 years and its first operating loss since it became a publicly listed company in 2001. The business posted same-store sales declines for many months.

In Japan, a human tooth was found inside a package of french fries in 2015, and a child was injured by a piece of plastic inside a sundae that was determined to be part of the machine used to make the treat. The Japan unit in 2015 closed more than 130 stores and again posted deep losses.

The company put in place a new loyalty program with coupons and amobile app to gather real-time customer feedback, cut executive pay, sought early retirement from corporate employees and remodeled restaurants. More recently, it announced a tie-up with hit smartphone game "Pokémon Go" to make its restaurants in Japan "PokéStops," where players can visit to collect items in the game.

The business began to turn the corner in the fourth quarter of 2015, when the Japan unit posted its best quarterly sales results in nearly four years, with a same-store sales increase of 1.6%. In the fourth quarter of 2016, same-store sales in Japan rose 17%. The Japan business has forecast a full-year profit for 2016.

McDonald's is expected to rake in about 6% of sales from the China deal during the 20-year agreement period with the purchasers, a group that includes Citic Ltd., its investment-management arm Citic Capital Holdings and U.S. private-equity firm Carlyle Group LP, people familiar with the situation said earlier. The Citic companies would own a combined 52% stake, while Carlyle would own 28%.

Wayne Ma and Atsuko Fukase contributed to this article.

Write to Kane Wu at Kane.Wu@wsj.com and Julie Jargon at julie.jargon@wsj.com

(END) Dow Jones Newswires

January 13, 2017 02:47 ET (07:47 GMT)

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