Pershing Square Activist Presentation Deck
November 2016, 79 slides
  1. Pershing Square
  2. McDonald's
  3. Related Decks
  4. Activist Presentation Decks
a value menu for square capital management | Pershing Square
disclaimer square capital management analysis and conclusions regarding corporation are based on publicly available information recognizes that there may be confidential information in the possession of the company and its advisors that could lead them to disagree with the approach is advocating the analyses provided include certain estimates and projections prepared with respect to among other things the historical and anticipated operating performance of the company such statements estimates and projections reflect various assumptions by concerning anticipated results that are inherently subject to significant economic competitive and other uncertainties and contingencies and have been included solely for illustrative purposes no representations express or implied are made as to the accuracy or completeness of such statements estimates or projections or with respect to any other materials herein actual results may vary materially from the estimates and projected results contained herein manages funds that are in the business of trading buying and selling public securities it is possible that there will be developments in the future that cause to change its position regarding the company and possibly reduce dispose of or change the form of its investment in the company recognizes that the company has a stock market capitalization of approximately and that accordingly it could be more difficult to exert influence over its board than has been the case with smaller companies | Pershing Square
a | Pershing Square
i overview of | Pershing Square
involvement with on square capital management presented a proposal for increasing shareholder value the proposal to management commends management for its strong operational execution over the past two years appreciates the willingness and openness of management to discuss the proposal management has taken our proposal seriously our proposal was presented to board of directors had a follow up meeting with management on when the company communicated its response to our proposal is pleased to have the opportunity to share the details of our proposal with the investment community | Pershing Square
review of world and retailer billion equity market value billion in estimated system wide sales system wide restaurants globally serves million customers daily in countries everyday out of eats at a one of the world most recognized brands consistently named in the top global brands along with coke and one of the retail property owners in the world estimated owned and controlled real estate market value of billion estimated restaurants where owns land and or building significant free cash flow business | Pershing Square
historical financial performance following declines in same store sales and profitability in and management has improved operations through product innovation capital discipline and strong execution as a result the company profitability has increased | Pershing Square
historical financial performance as a result of the company improved capital allocation tax free cash flow has increased from a five year low of billion in to billion in | Pershing Square
stock price performance although stock has rebounded from its lows it has been range bound in the low for the past five years and is significantly off of its high of per share reached in | Pershing Square
year indexed stock performance over the past five years has only slightly outperformed the while its peer group has vastly outperformed the index | Pershing Square
despite strong real estate assets number one market position and leading brand trades at a discount to its peers we believe this discount is due to a fundamental misconception about business versus its peers aba so so | Pershing Square
view of | Pershing Square
how the system works landlord restaurant operator franchisees franchises brand and collects fee operator operates restaurants landlord buys and develops real estate and leases to its franchisees real estate and franchise estimated tax roi of franchise fee of restaurant sales rent greater of a minimum rent or a percentage of restaurant sales current of sales bears all maintenance capital costs cost land cost building | Pershing Square
a landlord and restaurant operator real estate and franchise business landlord restaurant operator land buildings overstated margins due to | Pershing Square
characteristics of cash flow streams real estate and franchise business landlord restaurants | Pershing Square
adjusting for market rent and franchise fees in company operated restaurants appeared to contribute of total however once adjusted for a franchise fee and a market rent fee constituted only of total with the higher multiple real estate and franchise businesses contributing of total real estate and franchise real estate and franchise | Pershing Square
adjusting for market rent and franchise fees once adjusted for market rent and franchise fees would be contributing only of total maintenance with the real estate and franchise business contributing of total maintenance based on projections | Pershing Square
reconciling a a | Pershing Square
historical by business type as currently reported assuming of a is allocated to the real estate and franchise business an allocation that management indicates is conservative we indicate below the for and the real estate and franchise businesses as depicted in the reported we note that has historically appeared to contribute approximately of consolidated | Pershing Square
historical by business type adjusted for a market rent and franchise fee despite an economic recession in significant dips in system wide same store sales growth and declines in stock prices the real estate and franchise business has grown every year over the last five years | Pershing Square
real estate and franchise business stable and growing a a | Pershing Square
historical perspectives on did not historically operate restaurants the company initially entered the business of operating restaurants only as a defensive measure limited number of restaurants the idea emerged that we should operate a base of ten or so stores as a company this would give us a firm base of income in the event the brothers claimed default on our contract ray founder expansion of units first occurred in the late veteran franchisees were approaching retirement and needed liquidity stock was provided as a tax free exchange for the restaurants some of our operators had tremendous wealth but no money and we were using stock that was trading at times earnings to buy restaurants for seven times earnings turner former president and turner realized in the mid that owning too many units was not in the best interest of the company | Pershing Square
superior economics running a is a day a year business and an owner operator with his personal interests and incentives can inherently do a better job than a chain manager turner former president and illustrative characteristics of company operated versus operated restaurants structure taxes leverage levered returns general manager company operated operated corporation partnership corporate level tax no corporate level tax low teens salaried employee corporate manager and higher owner entrepreneur | Pershing Square
proposal to ill | Pershing Square
proposal step of step issue debt and pursue leveraged self tender of generates estimated of after tax proceeds issue of financing secured against real estate debt financing and proceeds assumes a used to multiple assumes of net debt allocated to refinance all of the existing of net debt at pro repurchase shares at per share pay in fees and transaction costs | Pershing Square
proposal pro at the time of signs market lease and franchise agreements with pro franco resulting pro is a world class real estate and franchise business from leverage is placed only on franco is maximizing its credit rating | Pershing Square
a transaction an of would have several positive strategic and financial implications for both pro as well as significant value creation for shareholders would trade at an approximate premium over where it trades today in the range of approximately per share creates investor transparency provides investors with transparent insight into profitability margins attractive profile levered margins and world class real estate franchise assets separation of highlights the significant value of rental income and franchise fees currently eliminated in consolidation enhances management focus and incentives at both entities enhances ability to attract and retain top management allows management team to focus on new product innovation improved marketing efforts real estate development programs and higher quality performance monitoring training | Pershing Square
a transaction improves operating and financial metrics at every level significantly improves and free cash flow margins enhances return on capital and overall capital allocation for the improves ability of to pay significant ongoing dividends margin margin maintenance margin | Pershing Square
a transaction an of would have several positive strategic and financial implications for both pro as well as will likely lead to improved operating margins at separation from will make margin improvement an imperative improves capital structure while maintaining investment grade credit rating low cost secured debt to replace current debt or issued on current structure cheap structured financing issued at could judiciously utilize strong real estate collateral financing is non recourse to parent franco remains and is at least a credit the holding company remains investment grade improves alignment with franchisees allows for share of higher return business separation of allows for share to be targeted predominantly at the free cash flow business tor | Pershing Square
a transaction an of would have several positive strategic and financial implications for both as well as allows for a voice in through governance supported by highly similar successful precedent transactions allows for an accelerated program increases overall size of investor base | Pershing Square
publicly traded comparable companies operating metrics are much closer to a typical real estate corporation or a high branded intellectual property business such as or coca cola than they are a typical mature choice | Pershing Square
reits typical trading multiples we believe reits trade in the range of depending on the type of real estate and the businesses the properties support a | Pershing Square
significant value creation for shareholders based on relevant publicly traded comparable companies including several real estate holding corporations pro would trade in the range of we believe would trade at a premium over where it trades today multiple range enterprise value less net debt plus remaining stake in equity value ending shares outstanding price per share premium to recent price implied multiple low high millions | Pershing Square
valuation summary and potential proceeds a | Pershing Square
pro valuation summary summary a | Pershing Square
capitalization and credit profile of pro set forth below are the sources and uses of proceeds associated with a issuance of secured financing net of cash on hand or an incremental of net debt based on expected net debt as of we have assumed a fixed rate for this financing after this transaction pro would be leveraged approximately total debt or at a debt to enterprise value ratio proceeds from this issuance would be used to repay existing debt shares and pay financing fees and expenses | Pershing Square
comparing credit with comparable real estate holding corporations i | Pershing Square
credit ratings of large public reits a review of large reits indicates that these businesses support investment grade ratings with a debt to enterprise value of on average as compared to pro which would have a debt to enterprise value of | Pershing Square
pro has a superior credit profile to a typical reit despite being a corp and lacking the tax advantages of a reit has several superior credit characteristics reits are required to pay of earnings through dividends whereas pro has much more credit flexibility has significant brand value to support its cash flows and overall credit | Pershing Square
company response to | Pershing Square
company response to asked its advisors to help review the proposal goal was to review the proposal to assess critical areas advisors reported back with judgments on valuation credit impact management reviewed the proposal to assess friction costs governance alignment issues a | Pershing Square
management concerns friction costs credit impact and governance issues friction costs credit impact alignment issues potential property tax rating agency consolidation revaluations legal costs large transaction for market mostly driven by financing of lease commitments viewed as leverage management stated that assuming adequate value creation none of these issues would prevent a | Pershing Square
valuation judgments made by advisors advisors were assigned to review the proposal in general advisors agreed with on valuation relative allocation of between and however their judgment was that would not enjoy significant multiple expansion would trade like a restaurant stock | Pershing Square
developing a response to the company | Pershing Square
response regarding friction costs and credit impact friction costs credit impact friction costs immaterial in the context of value creation friction costs and transaction delays were driven by financing similar transaction could be effected with corporate debt stability of cash flow stream and robust asset base should allow it to incur additional debt without a material adverse change in rating credit rating is | Pershing Square
alignment skin in the game conflict top line percent of sales bottom line some believe this conflict is mitigated by owning and operating units however many of the most successful operate few if any units historical subway current skin in the game is overstated due to lack of transfer pricing we believe represents of total value role as landlord shareholder and board member leaves them with ample skin in the game | Pershing Square
alignment benefits to franchisees of an independent would shift some power to the franchise base a good thing franchisees know what best franchisees have been the source of most product innovations i big mac egg filet fish apple pie driving force behind current process innovations call centers at drive would sharpen focus on being best in class level the playing field should compete on the same basis as franchisees pay market rent and franchise fees be focused on bottom line profitability be run by equity compensated management opportunity for franchisees to expand unit count heavy demand among operators to acquire manage additional units should units better managed by franchisees | Pershing Square
what it boils down to valuation of although there are some differences in opinion regarding friction costs leverage and potential alignment issues the key disparity between and the company views was regarding the valuation of pro | Pershing Square
a contribution pro is not a restaurant company brand royalty real estate | Pershing Square
comparable companies operating metrics are much closer to a typical real estate corporation or a high branded intellectual property business such as or coca cola than they are a typical intangible | Pershing Square
significant free cash flow yield dividend yield assuming no incremental debt at current price of approximately per share we estimate pro dividend yield would be approximately stock price share price multiple implied pro share price yield on pro a response | Pershing Square
pro stable and growing believes the best way to think about pro is as a growing annuity company so heed ors | Pershing Square
which would you rather own pro or a large retail reit response to the developing elt tax yield after tax investor yield | Pershing Square
which would you rather own pro or year treasury a response secure proposed tax yield after tax investor yield tax yield after tax investor yield | Pershing Square
which would you rather own pro or a treasury inflation protected security tips developing response to the company tax yield after tax investor yield | Pershing Square
valuation of as a growing annuity based on a review of the cost of capital of real estate holding corporations and intangible property franchise businesses like coca cola and choice hotels we believe that pro levered could have a discount rate in the area as such we believe would have a yield of this implies a equity valuation range of per share of equity value per share free cash flow | Pershing Square
conclusions is significantly undervalued today over of its cash flows comes from real estate income and franchise income proposal creates value for several reasons increases shareholder value improves management focus increases transparency improves capital allocation improves franchise alignment there are multiple ways to unlock value initial proposal variations on initial proposal | Pershing Square
next steps engage constituents regarding proposal shareholders franchisees broad investment community incorporate your feedback consider revised proposal | Pershing Square
a | Pershing Square
appendix | Pershing Square
a proposal assumptions | Pershing Square
general assumptions has assumed the following structural and tax assumptions with respect to an spin off of a | Pershing Square
structural and tax observations | Pershing Square
proceeds set forth herein is a schedule of the after tax proceeds from the after tax proceeds | Pershing Square
financing assuming owns the land and building of of its system wide units and owns the buildings of of its system wide units then a preliminary valuation of real estate suggests a value of billion | Pershing Square
cost of capital we estimated the asset betas of several real estate holding corporations and several high branded intellectual property businesses | Pershing Square
cost of capital based on a blended asset beta calculation we determined a range of values for the of | Pershing Square
financial analysis | Pershing Square
pro model key drivers set forth herein are the assumptions for the pro business | Pershing Square
as reported | Pershing Square
reconciliation set forth below is a table which reconciles pro and income statements the analysis demonstrates the flow of rent income franchise income and rent expense upon separation of the businesses | Pershing Square
reconciliation set forth below is a table which reconciles pro and income statements the analysis demonstrates the flow of rent income franchise income and rent expense upon separation of the businesses | Pershing Square
net capital expenditures reconciliation net capital expenditures in millions new restaurants net existing restaurants corporate other net capital expenditures consolidated pro | Pershing Square
summary income statement below are the summary projections for pro based on the assumptions detailed on page i | Pershing Square
summary cash flow and balance sheet below are the summary cash flow projections for pro based on the assumptions detailed on page | Pershing Square
financial analysis | Pershing Square
model key drivers set forth herein are the assumptions for the business | Pershing Square
summary income statement set forth below are the summary projections for based on the assumptions detailed on page financial analysis | Pershing Square
summary cash flow and balance sheet set forth below are the summary cash flow projections for based on the assumptions detailed on page | Pershing Square
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