From the Archives H/T @BarbarianCap

On September 22nd, Pershing Square Capital Management (“Pershing”) presented a proposal for increasing shareholder value (“the Proposal”) to McDonald’s Corporation (NYSE:MCD) management

  • Pershing commends McDonald’s management for its strong operational execution over the past two years
  • Pershing appreciates the willingness and openness of McDonald’s management to discuss the Proposal
  • Management has taken our Proposal seriously – our Proposal was presented to McDonald’s Board of Directors

Pershing had a follow-up meeting with McDonald’s Corporation (NYSE:MCD) management on October 31 when the Company communicated its response to our Proposal

Pershing is pleased to have the opportunity to share the details of our Proposal with the broader investment community

World’s largest foodservice franchisor and retailer

  • $42 billion equity market value
  • $55 billion in estimated system wide sales
  • 32,000 system wide restaurants, globally
  • Serves 50 million customers daily in 119 countries
  • Everyday 1 out of 14 Americans eats at a McDonald’s

One of the world’s most recognized brands

  • Consistently named in the top 10 global brands along with The Coca-Cola Company (NYSE:KO) and The Walt Disney Company (NYSE:DIS)

One of the largest retail property owners in the world

  • Estimated owned and controlled real estate market value of $46 billion (1)
  • Estimated 18,000 restaurants where McDonald’s Corporation (NYSE:MCD) owns land and/or building

Significant free cash flow business

Historical Financial Performance

Following declines in same-store sales and profitability in 2001 and 2002, Management has improved operations through product innovation, capital discipline and strong execution. As a result, the Company’s profitability has increased.

mcdonald's historical revenue

As a result of the Company’s improved capital allocation, pre-tax unlevered free cash flow has increased from a five-year low of $2.0 billion in 2002 to $3.5 billion in 2004.

mcdonald's free cash flow

Stock Price Performance

Although McDonald’s Corporation (NYSE:MCD) stock has rebounded from its 2003 lows, it has been range bound in the low $30s for the past five years and is significantly off of its high of $48 per share reached in 1999.

Mcdonald's stock price performance

5-Year Indexed Stock Performance

Over the past five years, McDonald’s Corporation (NYSE:MCD) has only slightly outperformed the S&P 500 while its QSR peer group has vastly outperformed the index.

Mcdonald's 5-Year Indexed Stock

McDonald’s versus its Peers

Despite McDonald’s Corporation (NYSE:MCD) strong real estate assets, number one QSR market position and leading brand, McDonald’s trades at a discount to its peers.

We believe this discount is due to a fundamental misconception about McDonald’s business.

mcdonald's vs peers

Pershing’s View of McDonald’s: Adjusting for Market Rent and Franchise Fees

In 2004, McDonald’s Corporation (NYSE:MCD) company-operated restaurants appeared to contribute 46% of total EBITDA. However, once adjusted for a franchise fee and a market rent fee, McOpCo constituted only 22% of total EBITDA, with the higher multiple Real Estate and Franchise businesses contributing 78% of total EBITDA.

mcdonald's Fees

Once adjusted for market rent and franchise fees, McOpCo would be contributing only 14% of total EBITDA-Maintenance Capex, with the Real Estate and Franchise business contributing 86% of total EBITDA-Maintenance Capex ,based on FY 2005E projections.

mcdonald's mcopco

Reconciling McDonald’s 2004A P&L

Set forth below is a table which reconciles McOpCo’s, the Real Estate and Franchise businesses’ and stand-alone McDonald’s FY 2004A income statements, assuming McOpCo pays a market rent and franchise fee. The analysis demonstrates that the Real Estate and Franchise business contributed approximately 78% of total EBITDA.

Mcdonald's ebitda

Historical EBITDA by Business Type: As Currently Reported

Assuming 75% of G&A is allocated to the Real Estate and Franchise business, an allocation that McDonald’s Corporation (NYSE:MCD) management indicates is conservative, we indicate below the EBITDA for McOpCo and the Real Estate and Franchise businesses, as depicted in the reported financials. We note that McOpCo has historically appeared to contribute approximately ~45% of consolidated EBITDA.

McDonald’s Consolidated EBITDA

Historical EBITDA by Business Type: Adjusted for a Market Rent and Franchise Fee

Despite an economic recession in 2001-2003, significant dips in McDonald’s system wide samestore sales growth and declines in McDonald’s Corporation (NYSE:MCD) stock prices, the Real Estate and Franchise business has grown every year over the last five years.

Adjusted for a Market Rent

See full report on A Value Menu for McDonald’s in PDF format here.

Bill Ackman: A Value Menu for McDonald’s