A hedge fund activist agitating for change at
is seeking to ratchet up pressure on the fast-food giant by buying $2 billion worth of its shares, according to a report from
Bill Ackman of Pershing Square Capital has sent a letter to others in the investment community looking to raise money for the acquisition and rally support for a potential proxy fight, according to the report, which cited "a person familiar with the matter."
At Tuesday's closing price of $39.06, a $2 billion purchase of McDonald's shares would give Pershing about 51 million shares, or a 4.2% stake, making it McDonald's third-biggest shareholder.
"The more stock we own, the greater influence we can have,'' Ackman reportedly wrote in the letter to investors, which
said it obtained from an unnamed source. "We need to be a large shareholder with the associated voting power to lead a credible proxy contest so that our ideas are considered more seriously by all stakeholders."
For its part, McDonald's on Wednesday announced a 49% increase in its dividend, citing confidence in the strength of its business and the reliability of its cash flow. The increase will raise the burger giant's annual payout to $1 a share from 67 cents.
Tara McLaren, a McDonald's spokeswoman, says the company's announcement about its dividend increase has no relation to the news about Pershing Square's investments. At least one shareholder, however, is skeptical.
"The timing of this dividend increase is interesting," says Whitney Tilson, managing partner with T2 Partners, a hedge fund that has McDonald's as its largest holding. "It shows that McDonald's is aware that there is someone else out there wooing its shareholders, and they want to be viewed as shareholder-friendly as possible."
This isn't the first time that Ackman has tried to woo shareholders at McDonald's. Last year, he put public pressure on the chain to spin off a portion of its company-operated restaurant business, take on debt and return value to shareholders through a dividend or a share repurchase. The business, Ackman said, was being undervalued because of the way it was structured.
McDonald's eventually placated Ackman by agreeing to provide more disclosure on the performance of its company-operated restaurant division, known as McOpCo, which the hedge fund manager had criticized as being an underperformer relative to the franchise business. The company also agreed to buy back shares, refranchise or sell roughly 2,000 restaurants and spin off
Chipotle Mexican Grill
, a trendy burrito chain that went public in January.
At the time, those steps were viewed as a compromise between McDonald's and its hedge fund agitator, but early this month, Ackman signaled that he's
hungry for more. The company disclosed in a regulatory filing that three investment funds managed by Pershing Square notified McDonald's of plans to acquire at least $793.8 million of its stock under the Hart-Scott-Rodino Antitrust Improvements Act.
Such notifications are typically made by investors who are planning to seek control or influence at a public corporation in some way. Wednesday's report appears to confirm Ackman's intentions to try and force change at McDonald's.
"This is a great situation because it's a great company, the fundamentals are improving, and there's a tremendous opportunity to create value with the steps
Ackman has pushed for," says Ken Shubin Stein, a hedge fund manager with Spencer Capital Management. "His ideas make sense, and ideas that make sense to gain a following, but either way, the stock gets momentum out of all this."
Shares of McDonald's were recently trading at six-year highs, up 81 cents, or 2%, to $39.87. The stock is up 18% for the year.
Ackman has said that shares of McDonald's could be worth as much as $61. In his recent letter,
said, the hedge fund manager credited the company with introducing products, restaurant renovations and advertising that led to sales gains. But he said its plan to sell restaurants, buy back stock and increase its dividend "has not gone far enough."
Ackman couldn't be reached for comment on this story. In a statement, McDonald's said, "We wouldn't comment on what Pershing Square said. As far as our business success is concerned, McDonald's performance speaks for itself. Our Plan to Win has driven 40 consecutive months of positive worldwide sales increases and double-digit increases in earnings per share for the past three years.
"In addition, since early 2003 McDonald's share price has more than tripled, a clear indication of the confidence investors continue to have in McDonald's business strategies."
The company reported a whopping 57% jump in second-quarter earnings in July. In the first half of the year, the company repurchased $1.8 billion shares, part of a plan to return as much as $10 billion to shareholders in dividends and stock repurchases through 2008.
"As passive investors, we win either way in this situation," says Tilson. "Ackman is a bold investor and has a big commitment in McDonald's to buy stock. We think his proposals make a lot of sense, and his actions also give us a nice tailwind."