From The Archives: Bill Ackman – A Value Menu for MCDVW Staff
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On September 22nd, Pershing Square Capital Management (“Pershing”) presented a proposal for increasing shareholder value (“the Proposal”) to McDonald's Corporation (NYSE:MCD) management
- Pershing commends McDonald's management for its strong operational execution over the past two years
- Pershing appreciates the willingness and openness of McDonald’s management to discuss the Proposal
- Management has taken our Proposal seriously – our Proposal was presented to McDonald’s Board of Directors
Pershing had a follow-up meeting with McDonald's Corporation (NYSE:MCD) management on October 31 when the Company communicated its response to our Proposal
Pershing is pleased to have the opportunity to share the details of our Proposal with the broader investment community
World’s largest foodservice franchisor and retailer
- $42 billion equity market value
- $55 billion in estimated system wide sales
- 32,000 system wide restaurants, globally
- Serves 50 million customers daily in 119 countries
- Everyday 1 out of 14 Americans eats at a McDonald’s
One of the world’s most recognized brands
- Consistently named in the top 10 global brands along with The Coca-Cola Company (NYSE:KO) and The Walt Disney Company (NYSE:DIS)
One of the largest retail property owners in the world
- Estimated owned and controlled real estate market value of $46 billion (1)
- Estimated 18,000 restaurants where McDonald's Corporation (NYSE:MCD) owns land and/or building
Significant free cash flow business
Historical Financial Performance
Following declines in same-store sales and profitability in 2001 and 2002, Management has improved operations through product innovation, capital discipline and strong execution. As a result, the Company’s profitability has increased.
As a result of the Company’s improved capital allocation, pre-tax unlevered free cash flow has increased from a five-year low of $2.0 billion in 2002 to $3.5 billion in 2004.
Stock Price Performance
Although McDonald's Corporation (NYSE:MCD) stock has rebounded from its 2003 lows, it has been range bound in the low $30s for the past five years and is significantly off of its high of $48 per share reached in 1999.
5-Year Indexed Stock Performance
Over the past five years, McDonald's Corporation (NYSE:MCD) has only slightly outperformed the S&P 500 while its QSR peer group has vastly outperformed the index.
McDonald’s versus its Peers
Despite McDonald's Corporation (NYSE:MCD) strong real estate assets, number one QSR market position and leading brand, McDonald’s trades at a discount to its peers.
We believe this discount is due to a fundamental misconception about McDonald’s business.
Pershing’s View of McDonald's: Adjusting for Market Rent and Franchise Fees
In 2004, McDonald's Corporation (NYSE:MCD) company-operated restaurants appeared to contribute 46% of total EBITDA. However, once adjusted for a franchise fee and a market rent fee, McOpCo constituted only 22% of total EBITDA, with the higher multiple Real Estate and Franchise businesses contributing 78% of total EBITDA.
Once adjusted for market rent and franchise fees, McOpCo would be contributing only 14% of total EBITDA-Maintenance Capex, with the Real Estate and Franchise business contributing 86% of total EBITDA-Maintenance Capex ,based on FY 2005E projections.
Reconciling McDonald’s 2004A P&L
Set forth below is a table which reconciles McOpCo’s, the Real Estate and Franchise businesses’ and stand-alone McDonald’s FY 2004A income statements, assuming McOpCo pays a market rent and franchise fee. The analysis demonstrates that the Real Estate and Franchise business contributed approximately 78% of total EBITDA.
Historical EBITDA by Business Type: As Currently Reported
Assuming 75% of G&A is allocated to the Real Estate and Franchise business, an allocation that McDonald's Corporation (NYSE:MCD) management indicates is conservative, we indicate below the EBITDA for McOpCo and the Real Estate and Franchise businesses, as depicted in the reported financials. We note that McOpCo has historically appeared to contribute approximately ~45% of consolidated EBITDA.
Historical EBITDA by Business Type: Adjusted for a Market Rent and Franchise Fee
Despite an economic recession in 2001-2003, significant dips in McDonald’s system wide samestore sales growth and declines in McDonald's Corporation (NYSE:MCD) stock prices, the Real Estate and Franchise business has grown every year over the last five years.
See full report on A Value Menu for McDonald's in PDF format here.