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McDonald's resists stock buyback plan

CHICAGO — An activist hedge-fund investor stepped up pressure Tuesday on McDonald's Corp., telling Wall Street the fast-food chain can boost its stock price dramatically if it spins off 65 percent of company-owned restaurants and focuses on more profitable real estate.

William Ackman, whose Pershing Square Capital Management LP owns a 4.9 percent stake in McDonald's, outlined publicly for the first time a strategy similar to one Pershing used to obtain divestitures — and a higher share price — this year at rival Wendy's International Inc.

McDonald's signaled its willingness to fight the Pershing proposal, dismissing it as "an exercise in financial engineering" that could pose serious strategic and financial risks and hurt its long-term health.

In a detailed presentation aimed at demonstrating that the company's stock is undervalued, Ackman has urged McDonald's to spin off nearly two-thirds of its 8,000 restaurants and borrow $14.7 billion against its real estate to buy back shares.

Those moves, he said, would help drive McDonald's stock as much as 50 percent to $45 per share to $50 per share and improve management focus and incentives at both the real estate-centered McDonald's and the new unit. The Oak Brook, Ill.-based chain owns 37 percent of the land beneath its more than 30,000 McDonald's restaurants worldwide.

Pershing bought a 4.9 percent stake in McDonald's in September, although Ackman acknowledged after the presentation that "almost our entire position" is in options, not shares.

The purchase stirred widespread speculation about a possible McDonald's spinoff in light of Pershing's move this year at Wendy's International Inc., where it bought a stake and nudged management to sell real estate and spin off its Tim Hortons coffee-and-doughnut chain.

McDonald's, however, issued a statement for at least the fourth time in two months saying it intends to continue with its existing strategy and is not interested in a restructuring involving its real estate. The company said two separate outside advisers had evaluated the Pershing idea negatively.

"The proposal is an exercise in financial engineering and does not take into account McDonald's unique business model," said the statement, attributed to Chief Financial Officer Matthew Paull. "While we remain open to ideas, we simply will not jeopardize the long-term health of our company, nor our relationships with customers, franchisees and suppliers for such a financial engineering exercise."

Despite their differences, Ackman praised the company's management.

"This is not a case at all where we think McDonald's is doing a bad job," Ackman said in an hour-long speech to the Value Investing Congress that was accompanied by slides and broadcast on the Internet. "Quite the opposite — we like management."

He called McDonald's "a very shareholder-friendly company. . . . So far we just haven't gotten the right idea, but we're getting close."

Backing from other large institutional investors would give Ackman's effort more of a chance, regardless of McDonald's resistance. Vornado Realty Trust is among those to have made purchases in the wake of Pershing's stake, and others could follow. Leon Cooperman, who runs the $4 billion-plus Omega Fund, attended the conference and called Ackman's proposal "very impressive."

Asked by reporters afterward if he might make a hostile bid if McDonald's doesn't cooperate, Ackman said: "I'm the most persistent person you will ever meet, particularly when I believe I'm right. That said, I don't think this will ever go to a proxy battle. I'm a huge believer in the power of our ideas."

He said there is a fundamental misperception that McDonald's is a restaurant company that owns a lot of real estate, yet nearly 90 percent of its economic earnings — excluding rent, fees and other items — come from real estate.

Getting McDonald's management out of the business of running restaurants would shed a low-margin, capital-intensive unit and enable it to focus on getting better results from franchisees, who already own a majority of the outlets anyway, he said.

Shares in the company fell 24 cents, or 0.7 percent, to close at $33.69 in trading on the New York Stock Exchange. The stock is up about 10 percent in the past year but — as Ackman noted — it is virtually unchanged from five years ago, closing at $33.31 on Nov. 15, 2000.