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Business

Strong recovery stalls McDonald's Japan share sale

Tastier-than-expected earnings, firm stock price stymied US owner's plans

McDonald's Japan has mounted a comeback, but its improved earnings stalled the U.S. owner's plans to sell a stake.

TOKYO -- Two wrinkles pushed McDonald's to shelve plans to sell a stake in its Japanese unit: restaurants recovered from earlier stumbles better than expected, and the unit's friendliness to stockholders has kept share prices high.

The fast-food titan decided in January 2016 to sell around 33% of outstanding shares in McDonald's Holdings Co. (Japan), in which it held a 50% stake -- writing off a market that had once supported the whole group, but foundered in scandals over meat quality and other issues.

The U.S. company put the plan on hold Tuesday, as one Japanese investment fund that had expressed interest was told early Wednesday morning. The freeze made perfect sense under the circumstances, said a source affiliated with the fund.

There were two reasons for the decision. First, McDonald's Japan had recovered enough to lift the parent company's overseas operations overall. Japan was "the biggest contributor" to a 10.7% year-on-year sales growth in foundational markets, Chief Financial Officer Kevin Ozan said in a Tuesday conference call on the company's January-March earnings.

McDonald's Japan suffered a net loss of over 34 billion yen ($305 million at current rates) for the year through December 2015 after customers fled amid scandals over expired chicken and tainted food. But the subsidiary dug in when the share sale was announced, closing around 130 underperforming locations and revamping its product lineup, such as by offering bargain-priced 200 yen burgers.

Now the Japanese unit's existing-store sales for the quarter through March have nearly caught up with those of the same period in 2014, before the troubles began. In terms of cash flow per location, the chain returned to levels seen when it was making its highest profits, said a McDonald's Japan-affiliated source.

Meanwhile, the parent's sales grew only 3.8% in high-growth markets such as China. The company's 8% net profit growth for the quarter would not have been possible without the lift from the Japan unit, in whose growth strategy and execution Ozan expressed confidence.

The second reason the sale was shelved is that McDonald's Japan's many individual stockholders enjoy warm treatment from the company -- holding 500 shares for a year, for instance, would earn one around 60 free Big Mac burger meals -- and tend to hold on for the long term. These retail investors make up about two-fifths of the company's total, so their tenacity helps keep the stock price firm.

The Japanese unit's stock price has climbed some 40% since McDonald's announced the share sale, and hit a year-to-date high of 3,450 yen last Thursday. "Given forecasts for strong January-March earnings, it may well advance further," says Seiichiro Samejima, chief fast food analyst at Ichiyoshi Research Institute.

From the beginning, potential investors found the offered 33% stake a "half measure," as one investment fund affiliate put it -- too small for significant influence over management. The sale's appeal has thinned even more amid higher share prices, throwing a wrench in the works for McDonald's.

But the plan has not been cancelled, only frozen. The burger giant has sold off operations in China and Taiwan in a global restructuring effort, with McDonald's Japan remaining as the only listed overseas unit. If earnings dip again, the sale could be back on the table.

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