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September 26, 2013

McDonald's Fracas with its Indian Joint Venture Partner

From The Economic Times' feature on the unfolding legal battle between the fast food giant and Vikram Bakshi, its partner in the joint venture (Connnaught Plaza Restaurants) for Northern and Western India and how it's in stark contrast to its cozy relationship with its franchisee (and former JV partner) for West and South India, Hardcastle Restaurants.

McDonald's, globally, does not like to own its ventures or operate them. Its preferred model is a low-risk, low-hassle one: licence out its good name for a fee to a local player; on top of that, charge a royalty linked to sales. So, the more the outlets sell, the more money McDonald's makes. Of its 34,000 outlets in 118 countries, 80% are through this franchise route. But when it entered developing countries, McDonald's often did so via the ownership model. A case in point was India, where it entered in 1995, with two 50:50 joint ventures, one with Bakshi and the other with Jatia.

...With both, McDonald's signed a 25-year joint venture agreement, which would run till 2020. Apart from sourcing from the same suppliers and coordinating for marketing spends, the two JVs did not interact much. Structurally, there was no difference between the Bakshi and Jatia ventures in the first 15 years. This changed in May 2010, when McDonald's decided to sell off its shares in the Jatia venture in favour of its Indian partner. This was the exact opposite of what, says Bakshi, McDonald's was asking of him around the same time. A petition filed on September 9 by Bakshi with the Company Law Board (CLB), the first port of call for corporate disputes, says that twice in 2008 McDonald's offered to buy him out, but he refused.


... In May 2010, in the 15th year of its 25-year pact, McDonald's entered into a new arrangement with Jatia. It sold its 50% stake back to Jatia, and that JV moved to the American company's preferred mode of franchise fee and royalty—a transition McDonald's has been making the world over, with India (the Bakshi venture) and China being the exceptions in the developing world today. Filings with the Ministry of Company Affairs show that McDonald's received next to nothing for that stake sale. It invested Rs 108 crore (Rs 15.5 crore as equity and Rs 92.5 crore as preference shares) in the Jatia venture, Hardcastle Restaurants. It realised just Rs 10.8 lakh and booked a loss of Rs 107.9 crore.

In the same petition, Bakshi says the recent action by McDonald's is intended to "coerce" him to sell. A clause in the JV agreement suggests that the removal of Bakshi as the MD gives McDonald's the right to buy his stake. This clause states: "(McDonald's can buy if) ...partner terminates or suffers the termination of his relationship as managing director of JV company, other than by reason of his death or incapacity." Besides the call option, McDonald's could also invoke a clause in the JV agreement which prescribes a valuation formula for share transfer among partners and which it waived off for Jatia.

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