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McDonald's to Sell Donatos

McDonald's Corp. (NYSE:MCD - News) on Monday gave Wall Street its latest signal that it is sticking to the basics of selling hamburgers and fries, announcing that it will sell its Donatos pizza business and curb growth of its other non-hamburger brands.

December 31, 2003

Monday December 15, 5:24 pm ET CHICAGO (Reuters)- McDonald's Corp. (NYSE:MCD - News) on Monday gave Wall Street its latest signal that it is sticking to the basics of selling hamburgers and fries, announcing that it will sell its Donatos pizza business and curb growth of its other non-hamburger brands. The world's largest restaurant company said it will sell its 182 U.S. Donatos restaurants back to original owner Jim Grote for an undisclosed amount. Grote, who founded the Columbus, Ohio-based chain some 40 years ago, sold it to McDonald's in 1999. Wall Street had been expecting McDonald's to disclose sell-off plans for some or all of the so-called "partner brands," which also include the fresh Mexican Chipotle chain and homestyle meal Boston Market chain, both based in Denver, Colorado. Combined, all three lost $66.8 million in 2002. Their $1.1 billion in sales are just a fraction of McDonald's $41.5 billion total. The company had promised news by year-end. Shares of McDonald's closed slightly lower. Analysts said there was some disappointment that the company did not lock in a deal to also divest the Boston Market chain, which they estimate has been posting flat results. "Keeping Boston Market surprised us," said CIBC World Markets analyst John Glass in a Monday note. "While Chipotle is a proven winner...Boston Market is break-even and (average store unit volumes) a lackluster $1 million," he said.McDonald's had also considered selling the Boston Market chain but was unwilling to part with it too cheaply amid a lack of interested buyers, according to sources familiar with the matter. Big private equity firms such as Texas Pacific Group (News - Websites) and Thomas H. Lee Partners were unwilling to bid, these sources said.LIMITING PARTNER BRANDS TO U.S.McDonald's said it expects to post charges of 23 cents to 28 cents a share in the fourth quarter, largely due to actions it is taking with its non-hamburger restaurants, annual asset impairment and other issues. Analysts said the size of the charge pressured the company's shares.The company plans to limit development of Chipotle and Boston Market to its primary U.S. market. Currently it operates 285 Chipotles and 652 Boston Markets in the United States. The chains will be evaluated for their growth potential under the continued leadership of Mats Lederhausen, managing director of the company's ventures. "We will begin 2004 with a clear direction for what we need to do with these brands," said Chief Executive Jim Cantalupo in a statement. "These two brands are sizable companies that can operate autonomously." Oak Brook, Illinois-based McDonald's has closed or will be closing all of its non-U.S. Boston Market and Donatos restaurants. The company was running two Canadian and seven Australian Boston Market units and three German Donatos. Cantalupo, a former McDonald's vice chairman who came out of retirement to take over the company early this year, has helped orchestrate a turnaround in the company's mainstay U.S. hamburger stores, which have seen comparable sales rise for eight straight months. Analysts said the current plans for the brands, long rumored to have been on the auction block, are in keeping with his back-to-basics strategy. He has focused on improving service and promotions at McDonald's more than 13,000 U.S. hamburger stores and trimming unnecessary capital spending. McDonald's also said it has a preliminary agreement to exit its joint venture in Fazoli's Restaurants Inc., a Lexington, Kentucky-based fast-casual Italian chain. No terms were provided.The company will maintain its minority interest in Pret a Manger, an upscale sandwich maker based in Britain. As previously planned, it will close Pret units in Japan. McDonald's shares closed down 36 cents at $25.42 on the New York Stock Exchange (News - Websites).