This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

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.

1 of 3

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 16,943.81 +28.74 0.17%
S&P 500 1,967.57 +2.89 0.15%
NASDAQ 4,415.49 +19.2860 0.44%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto
Advertising Partners

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs