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Pershing Turns Up McDonald's Heat

The battle for the future of McDonald's (MCD) heated up Tuesday morning, when a major hedge fund investor said he believes the burger giant's stock could trade anywhere from $10 to $15 higher if the company were to spin off its company-operated restaurants and focus instead on its lucrative franchise and real estate business.

Bill Ackman, managing director of Pershing Square Capital, which has amassed a 4.9% stake in McDonald's, brought his proposal public Tuesday morning at the Value Investing Congress conference in New York City.

Ackman said he first urged McDonald's management in September to spin off its company-operated restaurants (which he criticized as a costly and low-margin business) into a separate IPO and keep the remaining franchise business. Under the proposal, McDonald's would keep a 35% interest in the new IPO, but would generate its remaining income from rental leases and fees from franchisees.

The leftover McDonald's would become a real estate-heavy, brand-selling operation, somewhere between a retail real estate company and a brand-heavy firm like Coke (KO)or PepsiCo (PEP), Ackman said. The ideal outcome would be that Wall Street then valued the company higher.

Currently, about 73% of the McDonald's global restaurants are franchises; in the U.S., it's 85%, according to McDonald's. Although fees can vary, franchises pay the company, on average, a service fee of 4% of sales in the U.S., and average rent of 9% to 10% of sales. This roughly 13% of franchisee sales is what Ackman wants McDonald's to keep.

For its part, McDonald's rejected Ackman's proposal in late October. Ackman said he is now planning to revise the proposal and bring it to management's attention once again.

But once again, McDonald's isn't budging.

"In our view, the concept outlined at today's Value Investing Congress would not create significant value for McDonald's shareholders," McDonald's Chief Financial Officer Matthew Paull said in a statement. "McDonald's and two separate outside advisors have carefully evaluated the ideas presented and concluded that they would pose serious strategic and financial risks to McDonald's and our overall system.

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