Chinese firm files complaints with Chinese government over McDonald's China sale

By Michelle Price and Julie Zhu

HONG KONG (Reuters) - A Chinese consultancy that has previously helped to win antitrust battles against Coca-Cola and Apple has taken aim at McDonald's Corp, arguing in a complaint to regulators that the American fast food giant's China sale may hurt workers and consumers.

McDonald's said last month it had agreed to sell the bulk of its China and Hong Kong business to state-backed conglomerate CITIC Ltd and U.S. private equity firm Carlyle Group LP for up to $2.1 billion, in a deal that will see the consortium act as the master franchisee for a 20-year period.

The complaint, which follows allegations from a U.S. labour union that the transaction will likely lead to poorer pay and conditions for McDonald's 120,000 workers in China, could delay regulatory approval for the deal.

Beijing-based Hejun Vanguard Group, a Chinese management consultancy that has a track-record of representing domestic companies against foreign firms, filed two separate complaints against McDonald's with the Ministry of Commerce's (MOFCOM) antimonopoly bureau and its franchise office, Hejun Vanguard told Reuters.

While Hejun has stopped short of asking MOFCOM to block the deal, it has called on the regulator to closely scrutinize the transaction and take measures to prevent McDonald’s “abusing” what it claims is the company’s dominant position in the fast-food burger market in China.

It has also called for MOFCOM to investigate alleged violations of China’s franchise law by McDonald’s, which it claims has failed to properly register all of its outlets in mainland China.

MOFCOM had yet to respond to a request for comment at the time of publication. CITIC, CITIC Capital and Carlyle declined to comment.

McDonald's said it had filed its franchise business with MOFCOM in accordance with franchise regulations, and disputes Hejun's analysis of its market share in China. It added that its franchise model globally is based on mutually beneficial partnerships.

ROYALTIES QUESTIONED

Hejun said it was not acting for any specific companies in the case and generally seeks to protect domestic brands from overly aggressive foreign companies.

The Service Employees International Union, a U.S. labour organization, last year warned potential buyers of roughly 3,000 McDonald's restaurants in Asia that such deals could saddle them with operational risks, including significant costs and liabilities..

In January, it raised concerns over McDonald’s China deal, saying previous such transactions in markets - including Brazil and Puerto Rico - had put enormous pressure on franchisees, making it harder for them to provide adequate pay and conditions for their workers.

CITIC and CITIC Capital, an affiliate company that manages private equity funds, will hold 52 percent of the China business following the deal. Carlyle will control 28 percent, while McDonald's will retain a 20 percent stake.

McDonald's currently owns and operates most of its outlets on the mainland but the deal will see the fast-foot giant move to a franchise model that should allow it to continue to profit from sales while cutting costs.

"The deal will put enormous downward pressure on McDonald's master franchisees, existing franchisees that operate individual stores, and the workers and customers of those stores," said Li Su, CEO of Hejun Vanguard Group in a statement.

"Regulators should investigate the transaction and impose restrictions to prevent McDonald’s from abusing its dominant market position."

Hejun's submission, excerpts of which were reviewed by Reuters, says its analysis shows McDonald's has 53 percent of the fast-food burger market in China and that the company has abused its dominant position to extract higher than average royalties. McDonald's will charge royalties of 6 percent of sales in China under the deal, compared with 3 percent globally, says Hejun, citing The Wall Street Journal.

"As McDonald’s extracts excessively high royalties and its partners see a deteriorating bottom line, corner-cutting can result in lower quality products and even health concerns," the complaint claims.

"MUTUALLY BENEFICIAL"

McDonald's does not disclose its royalties and regards itself as a player in the "informal eating out" market, a company spokeswoman said, confirming that McDonald's had filed the transaction for approval by MOFCOM.

The company also pointed to awards recognising it as a top employer in China.

"Franchising is a key factor underlying McDonald’s success across the world based on mutually beneficial partnership. Our local franchisees have also received a wide range of awards in recognition of their local people brand," she added.

Hejun has had success with such complaints in the past, opposing Coca-Cola’s acquisition of Huiyuan Juice, the first deal ever blocked by MOFCOM, and was part of the team that fought a claim to make Apple pay $60 million in 2012 to use the iPad trademark in China.

MOFCOM has the discretion to take into account third-party complaints against companies and Hejun expects any review to take at least two months, said Shaun Wu, a China disputes lawyer at law firm Kobre & Kim which is acting for Hejun.

Companies in China have increasingly used antitrust complaints to try to hamper rivals.

(Reporting by Michelle Price; Edited by Martin Howell)