The deal, which is expected to close in the second quarter of this year, includes a 20-year license agreement. During a conference call, Matthew Paul, McDonald's senior EVP and CFO, said the cash deal represents approximately half of the $1.5-billion book value of the existing units. Initially, the parent company will collect 5% in royalties, and the percentage will escalate after 10 years.
This deal is in keeping with McDonald's previously announced developmental licensing strategy, Paul said, "which allows us to grow faster and become more locally relevant." Staton is expected to invest $100 million a year in adding new units and renovating existing ones throughout the region.
"Franchising is the backbone of our business," said Ralph Alvarez, president and COO, during the conference call. Three-quarters of the company's units are "franchised by entrepreneurs," he said, noting, "McDonald's Latin America has had double-digit comp-store gains for the past three years."
Paul said there are 600 restaurant units left in the developmental licensing pipeline. They are expected to go to franchisees by year-end 2008. McDonald's will retain some company-owned units, necessary for testing and development.
Meanwhile, the company's overall net earnings for the year's first quarter reached $762.4 million. This is a 22%-jump in comparison with the same quarter a year ago.
Comp-store sales for the quarter were up 8% in Europe, 8.5% in the Asia, Pacific, Middle East region, and up 4.4% in the US. "Comps were up just slightly in Canada," Alvarez said, "and we're not satisfied with that. We have a solid plan," he said, which includes the roll-out of snack wraps and some re-franchising of company-owned restaurants.
In Europe, Alvarez cited significant upside growth potential in Germany and Italy. The most profitable markets in Asia are Australia, Japan and China, respectively.
Breakfast sales continue to grow, particularly in the US, where tests of a bigger breakfast burrito are underway along with additional new product intros. The company plans to expand its premium coffee offering with iced coffee this year. "Down the road, we're adding specialty coffees, including latte and mocha," Alvarez said.
"Breakfast has very strong margins, and coffee makes them even better," he added. "There's very little discounting in breakfasts, and we have a pipeline of new products." He acknowledged that breakfast competition is accelerating, but noted that McDonald's has the largest share.
"Overall, the breakfast category grew 10% last year. Breakfast away from home is at about 11% in the US," he added, "and we expect that to keep growing. We've been making real estate decisions with breakfast side of the road in mind for several years."
MCD common stock was trading at $48.22 a share on the NYSE at mid-day following the April 20 conference call. This compares with a 52-week high of $49.13 a share on this April 17, up significantly from the 52-week low of $31.73 a share on June 13, 2006.
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