Less than a day after
brushed off calls for a restructuring, its words got drowned out when the market's most aggressive real estate investment trust revealed a stake in the burger giant.
, a firm run by well-known value investors Steve Roth and Michael Fascitelli, disclosed in a
Securities and Exchange Commission
filing Tuesday that it recently got control of 1.2% of McDonald's outstanding shares.
Vornado said in its quarterly filing that it acquired 858,000 McDonald's common shares in July, and it added another 14,565,000 in the September quarter through privately negotiated options transactions that behave like a margin loan. The cost basis on the shares owned outright is $29.54 a share, or $25.3 million. The options have an initial weighted strike price of $32.66 a share, or $475.7 million.
Shares of McDonald's were recently up 86 cents, or 2.7%, to $32.46 on the news. That gain is peanuts compared to the rally that Vornado inspired last year when it disclosed a stake in Sears just weeks before Ed Lampert's Kmart acquired the company and formed
. Lampert, who runs ESL Investments, owned a stake in both companies, and he's now the chairman of the combination -- not to mention the highest-paid hedge fund manager in 2004.
Vornado's disclosure of its Sears stake last November powered the retailer's shares to a one-day gain of more than 23%. This time around, its target is in far better shape on a competitive basis, but it has the same mouth-watering potential for a real estate goldmine.
"The Vornado-Sears deal was a deal based on undervalued real estate, and I think the Vornado-McDonald's deal is the same thing," said Howard Davidowitz, chairman of Davidowitz & Associates, a New York-based retail consulting and investment banking firm. "The underpinning of all this is real estate. On the outside, you've got a very healthy restaurant business, but it's undervalued because of the lack of recognition of the amount of real estate that McDonald's owns. They own a tremendous number of stores, and no one is better at sniffing out real estate value than Steve Roth."
The market first got keyed in to the real estate possibilities at McDonald's last month when Pershing Square Capital disclosed a 4.9% stake in McDonald's with designs on pressuring the burger giant to monetize assets and return value to shareholders.
Currently, McDonald's is run as a three-pronged company with its franchising business, its restaurant business and its real estate business. Pershing, run by prominent value investor Bill Ackman, reportedly favors a plan to spin off company-owned restaurants into a separate, publicly traded entity and then borrow against its untapped real estate, returning the money to shareholders through dividends and buybacks.
The hedge fund recently employed similar tactics with great success at
, one of McDonald's chief competitors. After months of browbeating during which Pershing scooped up a 9% stake in the company, Wendy's agreed to sell part of its Tim Hortons doughnut chain and authorized a $1 billion share buyback, sending its stock up 12% in one day to an all-time high.
So far, McDonald's has been lukewarm to Ackman's ideas. Pershing first revealed its stake in the company shortly before an analyst meeting in its hometown of Oak Brook, Ill. At the meeting, shareholders confronted McDonald's management about the idea of spinning off a real estate investment trust for tax savings and the realization of hidden value.
In response, McDonald's announced a number of shareholder-friendly actions, including raising its dividend, expanding its stock buyback plan and the partially spinning off its Mexican food chain, Chipotle Mexican Grill, through an initial offering during the first quarter of 2006.
On Monday, in an indication that pressure still exists to unlock the value of its real estate, McDonald's released a letter to franchisees that rebuffed the idea of a spinoff or a real estate investment trust.
"Neither would be in the best interests of our system or our shareholders," said the fast-food empire's chief executive, Jim Skinner.
Davidowitz said the emergence of Vornado into the situation will do even more to convince investors that there's a big value meal in its real estate portfolio.
"Skinner can say whatever he wants now, but the more shares these guys purchase the more likely it is that he'll change his tune," said Davidowitz, who doesn't own shares of McDonald's and whose firm has no investment banking relationship with the company.
Still, real estate speculation has its own stigma these days on Wall Street. A growing chorus of observers has concluded that a housing bubble is at hand.
"Real estate has been glamorized," Davidowitz said. "All of this can be traced back to Ed Lampert making billions of dollars with Kmart, when he bought it for cheap while it was in bankruptcy with all kinds of real estate assets. Now, we're seeing follow the leader. Everyone wants to do what Lampert did. The difference here is that McDonald's is a best-in-breed business in casual dining. Sears and Kmart are two old-world merchandisers who were getting killed by the competition that just got thrown together."
Meanwhile, none of the expected asset sales that formed the basis of the bull's case on Sears has occurred. The commercial real estate market in shopping malls has been flooded by stores for sale from
Federated Department Stores
Toys R Us
and others. Sears' stock has lost 24% since the beginning of August, after having been one of Wall Street's biggest winners in 2004.
"A lot of these other guys are in shopping malls, and there's lots of questions about how that space gets used these days," said hedge fund manager Peter Siris with Guerilla Capital. "McDonald's is a separate situation. It has a gigantic portfolio of undervalued real estate dating back to the 1960s. They own a lot of it, and they're in prime locations that aren't in the middle of a mall. Plus, Roth and Fascitelli have long and impressive track records. They're extremely smart, and this deal impresses me as a smart one."