McDonald’s to refranchise 1,600 units

OAK BROOK Ill. McDonald’s Corp. confirmed Friday it is refranchising nearly 1,600 units in Latin America and the Caribbean, a move that would spur growth in the overseas markets and reduce corporate earnings volatility, it said.

The company also reported a 22-percent jump in first-quarter profit on revenues that rose 11 percent to $5.46 billion.

The news sent McDonald’s stock price to an all-time high of $49.70 in trading, but it settled to a close of $48.36 per share, down nearly 1 percent from the day earlier. The Dow Jones Industrial Average closed the week at a record high, spurred by positive corporate earnings reports from numerous companies. The Standard & Poor’s 500 Index and the Nasdaq Composite Index rose to six-year highs. 

McDonald’s sale of 1,100 corporate units in Latin America and the transfer of licensing agreements for 500 franchised locations is part of the company’s continued refranchising efforts worldwide. A deal in Latin America — a notoriously difficult market for McDonald’s, as it has been plagued by legal troubles with franchisees in Brazil — was hinted at by the company and analysts in recent months. The company’s revenues from Latin America operations totaled $428.1 million in the quarter ended March 31, up 21 percent from the same quarter last year. The region’s same-store sales rose 14.7 percent for the quarter, well above the global same-store sales gain of 6.3 percent, McDonald’s reported in a regulatory filing. The region contributed about 3.4 percent to McDonald’s total quarterly operating income of $1.17 billion.

The deal in Latin America, which includes a 20-year licensing agreement with local entrepreneur and long-time McDonald’s franchisee Woods Staton, will net McDonald’s $700 million in cash, but also will result in a second-quarter charge of $1.6 billion. The transaction should close “in the next few months,” McDonald’s said.

In addition to the pending Latin American transaction, McDonald’s said it also would sell about 600 overseas restaurants to developmental licensees in various deals expected to close by the end of 2008.

McDonald’s chief executive Jim Skinner said that the efforts “will reduce volatility and further solidify our commitment to … focus management’s attention on the markets with the greatest impact on our results.”

Many securities analysts saw the deal as a positive for the company, which operates or franchises about 31,677 namesake restaurants worldwide.

“Latin America has been a grueling market for McDonald’s given the various controls, restrictions and bureaucracy in the region, making efficient management out of Oak Brook difficult, if not impossible,” analyst John Ivankoe at J.P. Morgan Securities Inc. said in a note.

McDonald’s net income for the first quarter ended March 31 totaled $762.4 million, or 62 cents a share, up from $625.3 million, or 49 cents a share, a year earlier.

The quick-service giant cited new menu offerings like the Snack Wrap and premium coffee items, as well as the chain’s “attractive everyday value” that many observers say is encouraging consumers to visit quick-service chain like McDonald’s rather than higher-priced, casual-dining concepts.