Reporter's Notebook
Peltz: McDonald's needs a 'culture change'

Peltz: McDonald's needs a 'culture change'

This post is part of the Reporter’s Notebook blog.

Nelson Peltz thinks McDonald’s Corp. needs a lot of work that will take months to accomplish. But don’t expect the activist investor to be the one to push it.

Speaking at CNBC’s Institutional Investor Delivering Alpha Conference on Wednesday, Peltz suggested that McDonald’s could take years before it rights its ship, which has been listing since 2012.

“The culture and mindset at the company has to be turned upside down,” said Peltz, the chairman of Trian Fund Management. “I don’t know if they have the stomach to do it, because it’s going to take a lot of quarters, maybe a lot of years, to get that thing righted. And I don’t know that shareholders will be patient enough.”

Wall Street has been speculating for some time that a serious activist could take a position at the Oak Brook, Ill.-based giant and push for major changes, like more refranchising or a spinoff of real estate.

Peltz would seem to be a natural option for one of those activists because he has the wherewithal to take on a giant like that. But Peltz already has a big investment in a burger company, The Wendy’s Company, of which he is the chairman.

But Peltz did say that McDonald’s has considerable potential, thanks to its clean balance sheet and its size. “If I wasn’t in Wendy’s, McDonald’s might be a place we could go,” he said.

As a top activist, Peltz’s comments indicate that other activists could see something similar in the burger giant and take a position and push for changes. As it is, Corvex Management and Jana Partners have taken small positions in McDonald’s.

Another name to cross off the list is Bill Ackman, founder of Pershing Square Capital and a one-time McDonald’s activist who is happy with his Burger King investment, much like Peltz is happy at Wendy’s.

“Ten years ago we went to McDonald’s and said you should refranchise all of your stores,” Ackman said. “They sort-of turned us down but took some steps in that direction. Five years later, the folks at 3G called. ‘We’re going to take Burger King private. We’re going to take your plan for McDonald’s and actually implement it.’

“Burger King was actually in a worse position than McDonald’s. Their store base was a disaster. They’d had 13 CEOs the 25 previous years. The best businesses are the ones that have been run poorly and have 13 CEOs in 25 years and they still exist. In five years, they’ve taken Burger King from being the worst, to being the best.”

Peltz, incidentally, noted that Wendy’s has since adopted a similar model. Wendy’s is refranchising stores, with plans to get down to 300 company owned units.

Both chains have taken the McDonald’s approach by keeping real estate on refranchised stores, leasing it back to franchisees and using that as an income stream.

Real estate is one of the primary potential objectives in any potential activist interest. McDonald’s controls its real estate, and there are suggestions among many Wall Streeters that the company spin it off and lease it back. McDonald’s has historically resisted that suggestion — and franchisees, for what it’s worth, vehemently oppose the idea.

“I’m not a fan,” Ackman said of real estate spinoffs. “I come from the real estate business. If you’re going to be in business for a long period of time, you want to control your real estate assets, as a retailer I believe and as a real estate company.”

That’s a surprise: In 2005, Ackman suggested that McDonald’s spin off its real estate.

Contact Jonathan Maze at [email protected]
Follow him on Twitter: @jonathanmaze

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