McDonald's Defends Its Strategy

The fast-food giant criticizes an activist hedge fund's plan, but pledges to provide more disclosure.
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Updated from 1:58 p.m. EST

McDonald's

(MCD) - Get Report

on Tuesday defended its rejection of an activist hedge fund's bid to transform the company, though the fast-food chain's earnings call did show that elements of the criticism are being taken to heart.

In recent months, Pershing Square Capital, which owns 4.5% of McDonald's, mostly through deep-in-the-money options, has publicly presented two proposals seeking to unlock shareholder value at the burger giant. McDonald's swiftly rejected both plans.

Pershing's

latest proposal called for McDonald's to spin off 20% of its 8,000 company-operated restaurants into a new public company, and sought to provide better disclosure for the performance of the company-operated stores. Pershing criticized the company-operated restaurants, known as McOpCo, as being margin underperformers relative to the franchise stores.

"An IPO has been served up as a panacea. Believe me, it is not," McDonald's Chief Financial Officer Matthew Paull told investors on Tuesday's call.

Paull reiterated McDonald's longtime argument that owning restaurants is critical to the company's relationship with franchisees. At the same time, he admitted that the U.S. franchise restaurants see margins that are 1.5% higher, on average, than McOpCo restaurants. He attributed much of the disparity to the entrepreneurial drive of franchise owners, who are more driven to increase sales and have better connections with local suppliers.

"A large public company with thousands of restaurants is not as nimble," Paull said.

He noted that McDonald's plans to reduce the number of its company-operated restaurants, but in the "right" markets.

The first change will come in the U.K., where McDonald's is planning to refranchise 800 of its company-owned restaurants, with 50 or more being completed this year. The margin gap between franchises and McOpCo restaurants is even wider in the U.K. than in the U.S, Paull said. The company is also eyeing some refranchising opportunities in Canada.

McDonald's partly acceded to one of Pershing's requests, saying it will provide better supplemental financial data on how the McOpCo restaurants are performing compared with the franchisees. The details of the plan were vague, other than that the company will provide some additional numbers for investors to crunch.

Over the next three years, the company also will change 1,500 restaurants in 15 to 20 countries (with the stores representing $1.5 billion in annual sales) into developmental licensee agreements -- where franchisees own the entire McDonald's restaurant business, including the real estate, and pay royalties on sales. This structure frees up capital for McDonald's to invest in foreign growth markets.

Pershing Square manager Bill Ackman declined to comment on the call. Even though his IPO proposal was rejected, McDonald's did toss him some bones to address his criticism. It remains to be seen, though, if that will be enough to satisfy him.

Earlier Tuesday, McDonald's reported

53% growth in fourth-quarter earnings amid strength in its U.S. business. The company earned $608.5 million, or 48 cents a share, in the quarter, up from $397.9 million, or 31 cents a share, a year earlier. Sales rose 4% to $5.23 billion. Analysts surveyed by Thomson First Call were forecasting earnings of 48 cents a share on sales of $5.21 billion.