McDonald’s Corp.’s struggles this year have led to speculation that the company could become a target for activist investors. Unsurprisingly, a disclosure Monday by a well-known activist fund in the Chicago-based burger giant generated considerable buzz about what could happen next.
Jana Partners LLC disclosed in an SEC filing Friday that it has purchased more than 800,000 shares in McDonald’s.
The New York-based hedge fund hasn’t filed official documents suggesting it has an activist investment. There are no indications yet that it is talking with management. And it’s certainly possible that Jana simply sees McDonald’s as an undervalued company. But the hedge fund’s history suggests that it could start pushing McDonald’s toward doing something different.
The investor is no stranger to activism. The front page of its website boasts that it “invests in change.” Barry Rosenstein founded the firm in 2001. He learned about corporate activism after working with Asher Edelman, around whom the Wall Street character Gordon Gekko was partly based.
Jana Partners, for instance, is currently pushing car rental company Hertz Global Holdings on a succession plan. It also has an activist investment in the workforce accommodation specialist Civeo Corp. In September, Rosenstein won a seat on the board at drugstore chain Walgreens.
McDonald’s has been the target of activists before. And, as the results of the Darden Restaurants Inc. proxy fight suggest, investors are giving these activists a lot of credit. Shareholders of Orlando, Fla.-based Darden gave activists all 12 of its board seats, a stunning turnover. McDonald’s stock rose as much as 2 percent Friday morning on news of the Jana investment.
McDonald’s may indeed be ripe for an activist, and there were rumors back in September that the company was a target.
While the company’s stock price has remained above $90 a share — and close to $100 despite its problems this year — it actually has a lower value than every other publicly traded quick-service restaurant company, based on multiples of its earnings.
Its price-to-earnings multiple is about 19x — meaning its per-share price is 19 times its earnings per share. By contrast, Yum! Brands Inc., The Wendy’s Co. and Jack in the Box Inc. all trade with ratios ranging from 23x to 32x. Burger King Corp., which is about to buy Tim Hortons Inc. and is fully franchised, has a price-to-earnings multiple of 65.
The low price and McDonald’s low debt levels could make it a target for activists. Bloomberg speculated last month that the chain could become an activist target. The Jana filing came just two weeks later.
The company’s domestic same-store sales have been weak. Its September sales were the worst for the chain in more than 10 years. U.S. same-store sales have fallen every month the past year, except in April, when comps were flat.
To turn the chain around, the company is unleashing a host of changes, including an organizational restructuring. It promises to reduce the size of its menu, and is even testing a build-your-own burger platform that mimics fast-casual chains like Chipotle. Some, including our own Lisa Jennings, think it could be a game-changer.
McDonald’s also tried being more transparent with its food manufacturing. And, hammered by critics over nutrition, it tried to make bubble-gum-flavored broccoli. It had predictable results.
All of those efforts could blunt any potential activism. But if the company can’t quickly turn around its sales performance, investors like Jana could start knocking on CEO Don Thompson’s door, looking to make suggestions.
What could they suggest? One popular target is real estate. Activists love pushing operators like Darden and Bob Evans Farms Inc. to sell real estate. But McDonald’s gets a substantial amount of its revenue from real estate, so such a scenario is unlikely.
Much more likely would be refranchising. Activists love pushing franchisors to selling units to franchisees, even when they don’t franchise in the first place. In 2006, the activist Bill Ackman pushed McDonald’s to sell company units to franchisees. An activist could also suggest operational changes, or push the company to borrow more money and buy back stock.
In September, J.P. Morgan analyst John Ivankoe suggested that McDonald’s stock could rise 10 percent to 20 percent if an activist pushed it to make changes.
One thing you won’t see — at least with Jana and at least right away — is a major public push. Jana’s Rosenstein is considered a successful activist, but has generally avoided aggressive public activism.
“I try to be very respectful,” Rosenstein told the Wall Street Journal in 2012. “I get a lot more out of these CEOs by not embarrassing them publicly, by not being viewed as trying to nail their scalp to the wall.”
Contact Jonathan Maze at [email protected].
Follow him on Twitter: @jonathanmaze
