Pershing Turns Up McDonald's Heat

"The proposal is an exercise in financial engineering and does not take into account McDonald's unique business model. While we remain open to ideas, we simply will not jeopardize the long-term health of our company, nor our relationships with customers, franchisees and suppliers for such a financial engineering exercise," Paull added.

The key disparity between Pershing's and McDonald's views, Ackman explained, regards the valuation of McDonald's after the spinoff of the operating company.

By shedding off its low-margin company-operated restaurants, Ackman believes the new McDonald's would trade at a multiple of 19.9 times to 22.2 times his 2006 EPS estimate of $2.27, meaning shares would hit between $45 and $50, with dividend yields between 5.1% and 4.6% respectively. Currently, McDonald's shares are trading near $34. "That would be one of the largest value creations in corporate America," Ackman said of the possible conversion.

"We also think this will attract a whole slew of new investors to the company," Ackman said. A brand business is more exciting than a restaurant business, he said. "Bottom line, it's not a restaurant company."

One of the biggest roadblocks to Ackman's plan seems to be the advice of the investment bankers that McDonald's hired to advise it on the proposal. In his presentation, Ackman said McDonald's told him that its investment bankers thought a post-spinoff McDonald's would still trade as a restaurant stock, with lower multiples. Ackman said the idea is "absurd" since he calculates the company is sitting on $46 billion of real estate. McDonald's current market cap is about $42.5 billion.

One institutional investor in McDonald's who was present at the conference Tuesday and who requested anonymity, told TheStreet.com that the multiple assumptions for a post-spinoff McDonald's is the key issue and suggested that using current real estate multiples could be misleading, given how real estate investment trust prices have run up in price over the past couple of years.