Valuations keep falling amid rising interest rates, changing consumer tastes
By Park Jae-hyuk
The Korean units of McDonald's, Burger King and KFC are facing growing skepticism over their recent attempts to find new owners for their franchises here, due to deteriorating conditions of both the fast food and financial markets.
Citing increased difficulties in fundraising and a growing preference among domestic consumers for healthier foods, industry experts anticipated that potential buyers will remain reluctant to offer higher prices for the Korean operations of the U.S. fast food chains.
"Because interest rate hikes have worsened the condition of the acquisition financing market, the pool of buyers who can afford higher prices has been smaller. Their simultaneous attempts for sale will also affect their valuations," a top executive of a domestic private equity firm (PEF) specializing in food and beverage (F&B) franchise buyouts said on condition of anonymity. "The rising costs for ingredients and labor are huge risks, because it is difficult for fast food chains to raise prices to offset their increased costs."
The M&A expert, however, added that the fast food franchisers in Korea have no choice but to attempt to sell their operations this year, so they can avoid worse market conditions next year.
"I heard that KG Group has regretted its acquisition of KFC Korea," he said.
After taking over KFC's Korean operation from a European PEF named CVC Capital Partners, KG Group has suffered from the fried chicken and hamburger franchise's snowballing losses, which resulted in a capital impairment in 2020.
Earlier this year, the group hired Samjong KPMG as an underwriter to sell KFC's Korean unit. The Korean firm is said to be desperate to sell the franchise for about 100 billion won ($78 million), to secure enough cash to buy SsangYong Motor.
As for McDonald's, the U.S. headquarters has made a second attempt to sell its Korean subsidiary, following the previous attempt in 2016, which ended in failure after potential buyers ― a consortium of Maeil Dairies and Carlyle Group, and another one formed by KG Group and NHN Entertainment ― dropped out of the deal, complaining about contract terms.
Mirae Asset Securities was selected as an underwriter for the sale of McDonald's Korea this time, replacing Morgan Stanley which had handled the 2016 deal.
"McDonald's is looking for a strategic partner in Korea to improve the company's growth. We are working with an external consulting firm to review various options. We will provide more details on the selloff at an appropriate time," a McDonald's Korea official said.
Its U.S. headquarters has sought to sell the rights to run its overseas restaurants to local firms since the early 2000s, in order to reduce debts and receive royalties on the rights. The company has reportedly wanted to sell McDonald's Korea to a strategic investor for its continuous and stable operation, rather than to a financial investor such as a PEF that would likely seek a divestment after five years.
The deteriorating profitability of its Korean unit, however, has weighed on its attempt. McDonald's Korea's operating losses reached 44 billion won in 2019, 48.3 billion won in 2020 and 27.7 billion won in 2021.
"Due to the country's declining population, the Korean market is not attractive for McDonald's anymore," said Suh Yong-gu, a professor of marketing at Sookmyung Women's University. "Premium burger brands entering the Korean market have also made it difficult for McDonald's to win the fierce competition here, because more consumers have preferred foods that look healthier."
Affinity Equity Partners, the operator of Burger King's Korean unit, is considered to be more desperate for a timely sale, because it is a PEF which is supposed to sell its portfolio company in a short period of time to distribute profits to its investors.
The Hong Kong-based PEF, which acquired Burger King's Korean subsidiary in 2016 and its Japanese subsidiary the following year, has been trying since late last year to sell the two subsidiaries for a combined 1 trillion won, after hiring Goldman Sachs as an underwriter for the deal. Following a preliminary bid in March, it was reported that the seller shortlisted a few potential buyers, including BHC Group, KKR and Elevation Equity Partners.
M&A market insiders, however, expressed skepticism about the acquisition of the hamburger chain by a PEF, pointing out that it will be difficult to raise its valuation further until divestment.