Activist investors are circling McDonald’s Corporation (NYSE:MCD), but the struggling hamburger purveyor is already doing most of the things such activists agitate for, even as MCD stock continues to slump.
A number of hedge funds with histories of activism have taken large stakes of MCD stock recently. Jana Partners LLC, Corvex Management LP and Glenview Capital Management are just three of the activist hedge funds buying up McDonald’s stock, and that has to have MCD management worried.
After all, these guys cause headaches and often get results. The last couple of years, Jana won two board seats at Walgreens Boots Alliance Inc (NASDAQ:WBA) and pressured PetSmart to sell itself to a private equity shop. Currently, the hedge fund is all over Qualcomm, Inc. (NASDAQ:QCOM), pushing the chip maker to cleave itself in two.
It’s understandable that MCD stock would attract the attention of activist hedge funds. McDonald’s stock has been underperforming for a while now and management still can’t figure out how to better compete with the upstarts stealing its customers away.
Chains like Chipotle Mexican Grill, Inc. (NYSE:CMG), Shake Shack Inc (NYSE:SHAK) and Panera Bread Co (NASDAQ:PNRA) are perceived as having fresher, healthier offerings than MCD, which has put McDonald’s sales in a funk. MCD stock has responded by dropping almost 4% over the last 52 weeks to trail the broader market by about 17 percentage points.
MCD Already Following the Activist Playbook
However, as much as it makes sense to see activist hedge funds cropping up in MCD stock, it’s not clear what they want. MCD is cutting costs, selling off assets and giving more cash back to shareholders, which are the three big things activists usually want. Indeed, MCD is selling more than $4 billion worth of bonds in both dollars and euro to help make good on its pledge to return $8.5 billion to shareholders.
McDonald’s watchers say one possibility is that the activists will pressure MCD to spin off its considerable real estate holdings into a real estate investment trust (REIT). MCD has strenuously rejected such a move in the past. So, it makes sense that it would take a bunch of activists ganging up to force such a change.
But is doesn’t make all that much sense in terms of getting McDonald’s stock moving again.
After stripping out all the restaurants and signs (which are of use only to MCD), the value of the real estate ain’t all that grand. According to MCD, the value of the land it owns comes to only $6 billion. That’s about 6% of its market cap or one quarter’s worth of sales. It’s too small to make much of a difference in the fortunes of McDonald’s stock.
MCD management is trying everything it can think of to fix the businesses, from changing the menu to selling off its company-owned restaurants to franchisees. What more could an activist hedge funds demand?
Nevertheless, as much of a pain in the butt activists can be for management, MCD needs all the ideas it can get. If activist investors can actually drive MCD to do better — and not just rattle management’s cage — maybe there will be hope after all for McDonald’s stock.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
