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Instant Analysis: McDonald's Looking to Sell Stake in Japanese Unit

By Rich Duprey - Dec 27, 2015 at 9:03AM

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The burger chain became the second fast-food chain seeking to minimize exposure to Asian markets.

What happened?
The Nikkei Asian Review reported McDonald's (MCD -0.54%) wants to sell anywhere from 15% to 33% of its holdings in its Japanese unit, McDonald's Holdings, hoping to gain around $817 million. McDonald's owns about half of the company, which it founded as a joint venture in the early 1970s.

Does it matter?
McDonald's Holdings was rocked by a scandal last year after Chinese news media uncovered that one of the company's suppliers was using expired meat in the food it shipped to the chain. Where the restaurant operator had expected to post a 6 billion yen profit for the year, it ended up recording a net loss of 17 billion yen in 2014, the first time in 11 years it hadn't been profitable. Nikkei reports that McDonald's is on track to post its second-consecutive loss this year -- as much as 38 billion yen.

The debacle also rebounded onto the parent company, as McDonald's' earnings fell an additional 7% as a result of the collapse at its Japanese unit. Per-share profits fell to $1.13 rather than the $1.22 they would have been absent the scandal, though 2014 was a bad year all around for the burger chain.

The scandal also touched another fast-food powerhouse in the region. Yum! Brands (YUM -1.33%), whose KFC chain in China was a customer of the same supplier, similarly saw sales crater, though its business was harder hit because it had been the second such supplier scandal it had to face down in as many years. And now, under pressure from activist investors, Yum! is planning to completely divest its China business.

Although not completely comparable situations, it's clear that both fast-food chains are trying to minimize the risk they've suddenly encountered in Asian markets. McDonald's, which has about 3,000 locations in Japan, and closed 131 restaurants there earlier this year, reportedly asked potential buyers to give them an answer by mid-January, and they will give the top prospect the right of first refusal.

Because McDonald's and Yum! Brands have both successfully operated in Asia for decades without incident, this seems a bit of an overreaction to what is likely a short-term problem. By selling upwards of a third of its stake in the Japanese unit, McDonald's is able to minimize the impact any future disruptions have on the whole, while still generating royalties -- making it a smart move overall.

Rich Duprey has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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