Selling debt to pay stockholder dividends. IDIOCY.
I wish that I understood more than I do about these investment moves. It reads like the two billion in new debt that is not being recommended by the analyist will be used to fund the reinvestments for EOTF and other reinvestments we have yet been told about. Over the life of these bonds the interest cost will be huge further reason to cut operating costs of the company and closing under performing stores. Issuing two billion dollars in debt takes a lot of time, analysis, planning and justification. There is a lot going on that the operators have not been informed of and it is far more than just EOTF. Hopefully, full explainations will be forth coming because we will be asked to "pay our share". Personally, I don't want to do any more until the company makes further progress with its down sizing and what they are calling its "turn around".
McDonald’s controllers and accountants are masters at funny math. They must buy back stock because they issue so much every year to the corporate officers and it dilutes the value of the company and of course they need to buy it back as it is not a growing company and that usually means a company has no new ideas. It is an excellent way to increase shareholder value and increase stock price so the stock is a higher price when the corporate officer leaves the company or just selling / exercising their shares. They also might be buying them back then once share prices increase they resell them again at a higher price to pay down debt. The article does not say what type of bonds they are issuing but I am hoping with that interest they are going to be paying they would be unsecured debt. If they are backed by assets the banks issuing them could own part of their real estate company later. They could also be convertible bonds which will reissue more stock shares later once all these current officers are gone.In the meantime, it will help their ratios. As a franchisee guess I could do this; loan my company money pay off debt temporary, have more working capital improve my ratios for a business review then re-barrow to pay myself back. All funny math and you never know what peoples’ true intentions are. The NLC should be asking these questions to Messrs. Ozan & Soenke; as all this affects how I want to reinvest in my business.
"The NLC should be asking these questions to Messrs. Ozan & Soenke"Please correct me if I am misunderstanding your comment but in my humble opinion the NLC, or any Operator group, has little business passing judgment on the financial maneuverings of McDonald's Corporation. While it would make for some interesting discussions it would only be a distraction. Meanwhile, there are thousands of people (shareholders, analysts) passing judgment on these financial decisions. Mcdonald's Operators have little standing here (unless they own a huge block of shares).The NLC and groups like it should be asking a different type of financial question such as, "Why are we still required to remodel and rebuild our landlord's building?".
You are not at all misunderstanding and appreciate your comment; you are correct they do not owe franchisees any explanation but they do the shareholders. But the operators can still ask the questions because most companies that buy back stock see little or no growth in their future or no new products to take to the consumer for growth; if that's the case why are we as franchisees being asked to do _______ (add whatever you would like).I do not think that is their thinking, there is no growth I am only speculating and being a smart-ass, they are most likely maneuvering to increase dividend yields and or share price.
Gotta fund those obscene multi million dollar golden parachutes like Don Thompson got !
Financial engineering on this scale can be a sign of a company that is out of big ideas (other than making operators spend operator money to support the McCafe brand so the executives can make money selling McCafe in the grocery stores and compete against us). When they take on debt and pay a dividend, the dividend is tax free because it isn't income. Of course it leaves the company less nimble, but for MCD it isn't a problem. It can lever up and drain the company because the operators can always be tapped to spend to keep up the real estate and equipment.
As a factual matter this debt has to be repaid. The cash to do that can only come from the stores. Unless, MCD has revenue streams I don't know about. The management decision to incur this debt does not involve the operators. The repayment of this debt does indirectly involve the operators. The wager is that part of this new debt will fund reinvestment's that will increase sales out of which a portion of the debt will be repaid. The debt will be used for other purposes, as well with the same planned result. I'm confident the debt could not be granted without intense detailed financial analysis and pro forma's. It is clear, I'm sure, what the annual debt service will be and the decision made to go forward. I have been following closely Easterbrooks goal and pledge to remove a half a billion dollars off of the USA P&L. Adding the interest on this debt to the USA P&L is a significant cost. To make this new interest cost nutural operating cost cuts must continue to be aggressive. He has about 21 months remaining to achieve his goal. The operators are asked to have complete their MRP's by the end of 2018, as well. If 2019 is not a banner year Easterbrook may be looking for a place to live in the English countryside. It is in all of our best interests that he experiences success.
"may be looking for a place to live in the English countryside." That's funny.In other words, he'd be "retiring" to spend more time with his sheep?
But seriously, you wrote, "It is in all of our best interests that he experiences success." I'm not sure that's true. It was certainly true when McDonald's was a growth company. The CEO's and the Operator's interests were pretty intertwined. But today, with McDonald's being a mature giant, Wall Street expects the CEO to be a financial engineer who will squeeze out every bit of income. Not every shareholder is interested in the long-term health of the company.Meanwhile, Operators remain interested in making a profit and building some equity. There needs to be a limit to how much the Operators will give up to save the CEO's job. But I'm sure you'll hear more about that at the meetings in Chicago.
Again, you are correct. The operators need strong and steady cash flow to live on and to service their debt. They also need a strong and growing pre-debt cash flow to build value and to expand their business. Like shareholders not all operators are interested in the long term financial health of the company or every store they own as long as they have a strong pre-debt cash flow that will attract buyers and financing. We don't own real estate. We own everything that is worth a nickle on the dollar in a bankrupcy. What we own of value is the "Pre-debt cash flow" or the cash that is avaliable to service debt. For me, that is where the value rests. Owning assets that require maintance, remodeling is risky, except for MCD as the operators have agreed to assume those costs for MCD. that is why it is important that every note taken to improve MCD assets include a draw for the operator. That requires strong pre-debt cash flow. MCD will make noise about not approving the financing but my position has been "approve the financing or no reinvestment". Of course, you have to have the cash flow to pay the debt or the banks won't make the loan and you are personally liable to the bank. If an operator agrees to spend $2.2mm to relocate a store and accept a 1% increase in rent it is not unreasonable to include $200,000.00 operator draw in the financing. If they want the relocation bad enough they will find away to approve the financing. I have a strong equity position simply because I've been in for nearly 40 years. However, I would much rather have the $48mm in cash than the equity. To reverse your point, there needs to be no limit of how much authority the company will give up to save an operators cash flow. They can't run it.
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