#1SQUARE PERSHING A Plan to Win / Win January 18, 2006 Pershing Square Capital Management#2DISCLAIMER Final Revised Proposal.ppt Pershing Square Capital Management's ("Pershing") analysis and conclusions regarding McDonald's Corporation ("McDonald's" or the "Company") are based on publicly available information. Pershing recognizes that there may be confidential information in the possession of the Company and its advisors that could lead them to disagree with Pershing's conclusions or the approach Pershing 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 Pershing 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. Pershing 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 Pershing to change its position regarding the Company and possibly reduce, dispose of, or change the form of its investment in the Company. Pershing recognizes that the Company has a stock market capitalization in excess of $40bn, and that, accordingly, it could be more difficult to exert influence over its Board than has been the case with smaller companies. 2#3D A Revised Proposal for Creating Value at McDonald's O SQUARE PERSHING Agenda Background of our involvement What are our objectives? Brief review of our Initial Proposal Our Revised Proposal Benefits of our Revised Proposal ✓ Company ✓ Franchisees ✓ Shareholders Q & A 3 Final Revised Proposal.ppt#4D A Revised Proposal for Creating Value at McDonald's PERSHING SQUARE Final Revised Proposal.ppt Pershing's Involvement with McDonald's September 22, 2005: Pershing Square Capital Management ("Pershing") presented a proposal for increasing shareholder value ("Initial Proposal") to McDonald's management October 31, 2005: McDonald's management communicated its response to our Initial Proposal Management believed that our Initial Proposal (1) would result in potential "frictional costs"; (2) could have an unfavorable credit impact; and (3) could create system issues McDonald's believed, based on its advisors' valuation, that there was not enough value creation to outweigh frictional costs and other concerns November 15, 2005: Pershing presented the Initial Proposal to the investment community Since November 15, we have had numerous discussions with shareholders and franchisees from around the world Today we would like to share our Revised Proposal for Creating Significant Value at McDonald's which incorporates feedback from McDonald's management, franchisees and other shareholders 4#5D A Revised Proposal for Creating Value at McDonald's n McDonald's What Are Our Objectives? Final Revised Proposal.ppt In developing our Revised Proposal, our objectives are to: ✓ Improve McOpCo's operating performance Strengthen the McDonald's System ✓ Unlock significant shareholder value We believe our Revised Proposal will: ► Achieve these objectives ► Address all of the Company's concerns regarding our first proposal Increase McDonald's share price to $46-$50 per share (before considering any operational benefits) Minimize execution risk and management distraction 5#6Objective 1: Improve McOpCo's Operating Performance#7a A Revised Proposal for Creating Value at McDonald's Objective 1: Improve McOpCo's Operating Performance Final Revised Proposal.ppt McOpCo, as a wholly owned subsidiary, is not achieving its full business and financial potential ► McOpCo does not pay a market rent or a franchise fee, unlike a typical franchisee Adjusting for a market rent and a franchise fee, McOpCo has lower average unit margins than those of an average U.S. franchisee "Corporate subsidies" in the form of uncharged rent and uncharged franchisee fees have led to McOpCo being run inefficiently over time Uneconomical capital allocation decisions Suboptimal pricing policy 7#8D A Revised Proposal for Creating Value at McDonald's Estimated 4-Wall EBITDA Margins 16% Estimated 4-Wall EBITDA Margin % 12% 8% 4% 0% McOpCo's Estimated Average Unit EBITDA margins versus U.S. Franchisees' Estimated Average Unit EBITDA margins(¹) 12.7% (1) Avg. U.S. McOpCo Objective 1: Improve McOpCo's Operating Performance (cont'd) 8.8% (1) Avg. Intl. McOpCo Adjusted for a Market Rent and Franchise Fee I I Final Revised Proposal.ppt 14.8% (2) Avg. U.S. Franchise Note: See page 57 of the Appendix for Pershing's detailed assumptions. 1) Analysis is based on Pershing's estimates using 2004 financial data. McDonald's does not provide average unit data for McOpCo or McDonald's franchisees in its public financials. Assumes a market rent of 9% of sales and a franchise fee of 4% of sales. 2) Based on $260k of average EBITDA per franchised store and average revenues per franchised store of approximately $1,760k. 8#9a A Revised Proposal for Creating Value at McDonald's Final Revised Proposal.ppt Objective 1: Improve McOpCo's Operating Performance (cont'd) McOpCo managers do not have appropriate compensation incentives ►No direct equity compensation in McOpCo's business ►No market-based performance measurement system ▶ "Far Team" mentality whereby the best McOpCo managers are promoted to corporate McDonald's If they don't join corporate McDonald's, they sometimes leave to become a franchisee Top restaurant operators need more incentive to stay at McOpCo 9#10D A Revised Proposal for Creating Value at McDonald's 3 "Earn the Right to Own" McOpCo's restaurant portfolio needs to be optimized in order to improve margins and capital allocation McOpCo Objective 1: Improve McOpCo's Operating Performance (cont'd) Refranchise select units in mature markets Redeploy capital and resources in emerging markets Final Revised Proposal.ppt McOpCo increases focus on emerging markets growth 10 Because of their developed franchise systems, mature markets do not need the same capital or resources as emerging markets e.g., U.S., Canada and U.K. Capital and freed-up resources from refranchising hould be redeployed in fast growing / high return emerging QSR markets Regions where franchise laws are still in infancy and McDonald's franchise base is not yet sufficient to drive growth e.g., China and Russia McOpCo should increase its focus on profitable emerging markets growth#11Objective 2: Strengthen the McDonald's System#12a A Revised Proposal for Creating Value at McDonald's Objective 2: Strengthen the McDonald's System Final Revised Proposal.ppt Pershing spoke with franchisees from around the world. Here's what they told us: (1) Inherent conflict between McDonald's and the Franchisees: McDonald's "Top-line" focus versus Franchisees' "Bottom-line" focus ► McDonald's makes the bulk of its profits from the franchisees' top line However, top line same-store sales growth does not always translate into improving franchisees' bottom line ■ Stock market often rewards McDonald's for higher same store sales growth even though the franchisees are sometimes pressured to sacrifice margin for discount pricing (2) McOpCo, with its subsidized economics, magnifies this conflict ► McOpCo does not compete on equal footing because it does not pay a market rent or franchisee fee ► Suboptimal pricing or capital allocation decisions do not impact McOpCo's financials as dramatically as those of franchisees ► Perception among franchisees is that McOpCo is not held to the same degree of accountability 12#13a A Revised Proposal for Creating Value at McDonald's Final Revised Proposal.ppt Strengthening the McDonald's System: What Franchisees Had to Say (3) Capital allocation criteria I decision-making process varies between McOpCo and the franchisee community ► Low ROIC investments are occasionally forced upon franchisees ► McOpCo regional managers often make capital investment decisions they will not have to live with, given their status as salaried employees with limited tenure in any one position "Made for You" program is an example of a historical capital investment decision that may have been amended or prevented by an arm's-length McOpCo ■ Hundreds of millions of dollars of capital invested in a kitchen system that is widely considered inefficient For many franchisees, it has led to decreased profitability, increased wait times and increased staffing requirements ■ Testing at McOpCo did not reveal the true economic impact of the program ■ "Made for You" problems could have been prevented if the system had the appropriate "checks and balances" 13#14a A Revised Proposal for Creating Value at McDonald's Strengthening the McDonald's System: What Franchisees Had to Say (cont'd) (4) McOpCo undercuts on pricing ► McOpCo's subsidized economics reduce the impact of lower margin product pricing decisions Final Revised Proposal.ppt As such, approximately 27% (¹) of the McDonald's system currently does not price optimally Reduces the profitability of the entire system Underpricing at McOpCo pressures franchisees to sacrifice "penny profits" for traffic and sales volume (5) McDonald's should retain control of McOpCo ▸ Franchisees generally agreed that control of McOpCo should remain with McDonald's Keeps the franchisee vote democratic and dispersed (1): Based on approximately 8,119 McOpCo restaurants out of 30,516 systemwide McDonald's restaurants, as of 2004. 14#15a A Revised Proposal for Creating Value at McDonald's Strengthening the McDonald's System: What Franchisees Had to Say (cont'd) Final Revised Proposal.ppt (6) Strong interest in owning new units / McOpCo refranchising program ▸ Franchisees have a strong interest in buying McOpCo restaurants ■ Given McDonald's exclusivity requirements for franchisees, the only opportunity for franchisees to materially increase their wealth is to own more McDonald's units ▸ A refranchising program would create an attractive incentive system Would allow the top quartile performing operators to be rewarded with an opportunity to increase units ► McOpCo's current portfolio of restaurants needs to be rationalized through refranchising, in order to Increase McOpCo's profitability ■ Improve systemwide same-store sales growth ■ Satisfy considerable franchisee demand 15#16Objective 3: Unlock Shareholder Value#17D A Revised Proposal for Creating Value at McDonald's Brand McDonald's Real Estate McDonald's controls substantially all of its systemwide real estate Earns 9% of systemwide unit sales as rent Objective 3: Unlock Shareholder Value at McDonald's Collects a royalty of 13% of systemwide sales For real estate it does not own, it pays a rent expense and generates income through subleases Franchise M McDonald's 17 Approximately 32,000 restaurants where McDonald's receives 4% of unit sales Final Revised Proposal.ppt McOpCo Restaurant Operations Over 8,000 McDonald's company operated restaurants#18a A Revised Proposal for Creating Value at McDonald's There are very few businesses in the world with all the attractive business characteristics of Brand McDonald's (1) Based on Pershing's estimates. Assumes McOpCo pays a market rent and franchise fee. Objective 3: Unlock Shareholder Value at McDonald's (cont'd) McDonald's Brand McDonald's Final Revised Proposal.ppt Collects a royalty of 13% of systemwide sales Real Estate Franchise ✓ World-leading brand ✓ ~ 60% EBITDA Margins (1) ✓ Low maintenance capital requirements ✓ ~ 55% EBITDA - maintenance capex margins (1) Low operating leverage / high earnings stability ✓ High ROIC ✓ Low cost of capital ✓ Valuable fixed asset base ✓ 50 year track record ✓ Global and diverse customer base 18#19D A Revised Proposal for Creating Value at McDonald's The first step to unlocking shareholder value is to introduce transparent segment financials. Objective 3: Unlock Shareholder Value at McDonald's (cont'd) Financial statements are not transparent Final Revised Proposal.ppt ► McOpCo does not pay an "arm's-length" rent or franchise fee to Brand McDonald's ► As such, reported financials do not make apparent that approximately 80% of McDonald's EBITDA is derived from the higher multiple Brand McDonald's ► Issuing transparent segment financials for McOpCo and Brand McDonald's would demonstrate ✓ True profitability of Brand McDonald's ✓ True operating margins and capital requirements at McOpCo 19#20D A Revised Proposal for Creating Value at McDonald's 2004 Total EBITDA As Reported In 2004, McDonald's company-operated restaurants appeared to contribute 46% of total EBITDA. However, once adjusted for a franchise fee and a market rent fee, McOpCo constituted only 22% of total EBITDA, with Brand McDonald's contributing 78% of total EBITDA. 54% Brand McDonald's McOpCo Brand McDonald's Total 46% 2004 EBITDA $2.4bn 2.8bn $5.2bn Objective 3: Unlock Shareholder Value at McDonald's (cont'd) McOpCo % 46% 54% 100% 2004 Total EBITDA Adjusted for Market Rent and Franchise Fees 78% Brand McDonald's McOpCo Brand McDonald's Total Final Revised Proposal.ppt 22% 2004 EBITDA $1.1bn 4.1bn $5.2bn McOpCo 22% 78% 100% Note: The analysis assumes that 75% of the total G&A is allocated to Brand McDonald's business and 25% is allocated to McOpCo. McDonald's management has indicated this is a conservative assumption regarding Brand McDonald's. Analysis excludes $441 mm of non-recurring other net operating expenses. 20#21D A Revised Proposal for Creating Value at McDonald's Objective 3: Unlock Shareholder Value at McDonald's (cont'd) McDonald's is fundamentally Not a restaurant company McDonald's FY 2005E EBITDA - Maintenance CapEx, Adjusted for a Market Rent and Franchise Fee(¹) McOpCo 86% 14% Final Revised Proposal.ppt Brand McDonald's Why is it valued as such? (1) FY'05E EBITDA- Maintenance CapEx contribution is based on Pershing's estimates. CapEx is net of proceeds from restaurant closings. We note that the Company does not provide EBITDA and Maintenance CapEx allocation by segment. 21#22a A Revised Proposal for Creating Value at McDonald's e Lack of transparency had created an undervaluation by the market ► McDonald's currently trades at roughly 8.9x EV/2006E EBITDA), despite over 85% of its pre-tax unlevered cash flows being generated by Brand McDonald's (2) (2) (3) Final Revised Proposal.ppt Objective 3: Unlock Shareholder Value at McDonald's (cont'd) We believe Brand McDonald's, valued independently, is worth 12.5x - 13.5x EV/'06E EBITDA High branded intellectual property/franchise businesses such as Choice Hotels, PepsiCo and Coca-Cola trade in the range of 12x - 19x EV/'06E EBITDA ■ Real Estate C-Corporations and REITs typically trade in the range of 13x-16x EV/'06E EBITDA Only when Pershing's ideas regarding transparency became public did Wall Street analysts begin deriving sum-of-the parts valuations in the mid $40s per share Recent UBS sum of the parts valuation: $46 per share (3) ■ Recent Goldman Sachs sum of the parts valuation: $44 per share (4) Based on McDonald's recent stock price of $34 per share. Pre-tax unlevered cash flows calculated as FY'05E EBITDA- Maintenance CapEx. We note that FY'05E EBITDA- Maintenance CapEx contribution is based on Pershing's estimates. CapEx is net of proceeds from restaurant closings. The Company does not provide EBITDA and Maintenance CapEx allocation by segment. UBS research report dated 11/10/2005. Goldman Sachs research report dated 11/18/2005. McDonald's sum-of-the-parts valuation of $44 is before estimated frictional costs. 22#23Review of our Initial Proposal#24N A Revised Proposal for Creating Value at McDonald's Our Initial Proposal called for... (1) Step 1: Step 2: Step 3: Step 4: Review of Our Initial Proposal McOpCo to be organized as an independent entity ■ Signs "arm's-length" rent and franchise agreements with McDonald's IPO of 65% of McOpCo Issue $14.7bn of financing secured against real estate ■ Implies approximately $9.7bn of incremental debt Assumes $6.35bn of net debt on 12/31/05 at consolidated McDonald's of which $1.35 bn of net debt is allocated to McOpCo and $5.0 bn of net debt allocated to Brand McDonald's. McOpCo is deconsolidated and transparent financials are released to investors Final Revised Proposal.ppt Use Debt financing and IPO proceeds to ■ Refinance all of the existing net debt (approximately $5bn ) at Brand McDonald's (¹) Repurchase shares and pay transaction fees and expenses Our Initial Proposal is available on the internet at http://www.valueinvestingcongress.com/Final-Pres.pdf 24#25D A Revised Proposal for Creating Value at McDonald's There have been several mischaracterizations of our Initial Proposal which we believe need to be cleared up. Mischaracterizations of Our Initial Proposal... Final Revised Proposal.ppt Our Initial Proposal did NOT: ► Provide for the sale of any real estate by McDonald's ► Put franchisees in danger of having a new landlord Involve the creation of a REIT ► Require a real estate financing to create significant value ► Hinge on a leveraged share buyback as its primary method of value creation Our Initial Proposal did: ► Assume significant value would be unlocked once McOpCo was IPO'ed and investors had access to transparent financials for Brand McDonald's, demonstrating that it is fundamentally NOT a restaurant company 25#26a A Revised Proposal for Creating Value at McDonald's Management Franchisees Shareholders Concerns Regarding Initial Proposal Frictional Costs Frictional costs associated with the CMBS financing and taxes due to the 65% McOpCo IPO Concerns regarding a potential new landlord (rent hikes) Credit Impact $9.7bn of incremental leverage may put pressure on credit rating Concerns regarding any potential increase in borrowing costs Management distraction Execution risk 26 Final Revised Proposal.ppt Alignment Issues Brand risk due to a loss of McOpCo control McOpCo will compete for new units Fear of preferential treatment of McOpCo#27Our Revised Proposal#28a A Revised Proposal for Creating Value at McDonald's Our Revised Proposal Step 1: Issue Transparent Segment Financials ► McOpCo signs arm's-length lease and franchise agreements with McDonald's Corporation ■ McDonald's Corporation requires McOpCo to pay a market rent and franchise fee ► McDonald's Corporation issues transparent segment financials for arm's-length McOpCo and Brand McDonald's (1) Assumes IPO transaction fees and expenses of 5% of IPO proceeds. 28 Step 2: IPO 20% of McOpCo Final Revised Proposal.ppt ► McOpCo creates a separate Board of Directors ■ At least one Board member appointed from the franchisee community ► IPO 20% of McOpCo 20% IPO will generate no tax costs given existing tax basis ► McDonald's retains full control of McOpCo Minimal execution risk Frictional costs of roughly 5 cents per share (¹) (versus management estimates of $4-$5 per share for the Initial Proposal) Continued#29D A Revised Proposal for Creating Value at McDonald's Our Revised Proposal (cont'd) Step 3: Commence McOpCo Refranchising Program ► McOpCo commences refranchising 1,000 units in mature markets (U.S., Canada and U.K.) over the next two to three years ► Proceeds from refranchising can be redeployed in fast growing, high return emerging markets (China and Russia) (1) Assumes $843mm of dividends paid in FY2005E. FY2005E dividend payout ratio based on 9/30/2005 Last Twelve Months after-tax free cash flows, calculated as operating cash flows less cash flows from investing activities. 29 Final Revised Proposal.ppt Step 4: Dividend Increase and Share buybacks McDonald's increases its dividend payout to 90% of after-tax free cash flow from roughly 35% of free cash flow currently (1) ■ Implies a dividend of $1.93 per share in FY 2006E versus 0.67 per share in 2005 At a recent price of $34 per share, implies a new dividend yield of 5.7%, versus current yield of ~ 2% ► McDonald's Corporation initiates incremental share buybacks using existing cash on hand and IPO proceeds ► Revised Proposal requires no incremental debt to be issued over total debt position as of 9/30/05#30a A Revised Proposal for Creating Value at McDonald's Management Franchisees Shareholders Frictional Costs Addressing Concerns Regarding the Initial Proposal No taxes ✓No CMBS financing ✓ No incremental debt Minimal transaction costs ✓ No transfer of property No rent hikes Credit Impact Transparency improves credit profile ✓ No increase in borrowing cost for operators 30 Final Revised Proposal.ppt ✓ ✓Maintain control of McOpCo Retain flexibility Minimal management distraction Minimal execution risk Alignment Issues ✓ Preserves highly "democratic" franchisee system McOpCo will be a net seller of units in mature markets#31A Revised Proposal for Creating Value at McDonald's Current Issue McOpCo is not reaching its full business and financial potential Managerial focus and incentives Final Revised Proposal.ppt Improving McOpCo's Operating Performance Benefits of the Revised Proposal ✓ IPO of McOpCo would make margin improvement a key focus ✓ No more corporate subsidies to buttress operating margins ✓ McOpCo management can run its business based on the most appropriate operating strategy ✓ Publicly traded arm's-length McOpCo would force improved capital allocation decisions and optimal pricing policy Refranchising and redeploying capital/resources would better position McDonald's in the most attractive growth markets ✓ Investors will respond well to margin and capital allocation improvement as well as the emerging markets growth story ✓ McOpCo's management can be compensated based on the market performance of its business ✓ McOpCo managerial focus will improve as a result of having greater accountability, increased responsibility, a better performance measuring yardstick via the public markets and more direct incentives 31#32D A Revised Proposal for Creating Value at McDonald's Strategic Benefits to the McDonald's System Final Revised Proposal.ppt Pershing believes that a publicly traded arm's-length McOpCo, which remains controlled by McDonald's, would strengthen the McDonald's System. McOpCo makes optimal pricing, capital allocation and refranchising decisions ► Arm's-length McOpCo's decision-making criteria on product pricing and capital allocation will be substantially similar to that of the franchisee community ► McOpCo, no longer subsidized by Corporate McDonald's, will review its restaurant portfolio more closely for refranchising rationalization / opportunities ■ Refranchising program would create an incentive system whereby the best operators would be rewarded with an opportunity to own new units Poor performing operators will be motivated to improve performance to earn the right to own more restaurants Franchisees would recognize that the new McOpCo competes on equal footing McOpCo, required to pay arm's-length rent and franchise fees, would face the same economic consequences as franchisees, thus creating a better aligned system ► Improves fairness and accountability throughout the system 32#33a A Revised Proposal for Creating Value at McDonald's Strategic Benefits to the McDonald's System (cont'd) Final Revised Proposal.ppt Would increase McDonald's credibility in the system and allow it to better understand the true impact of new product introductions ► Testing products at arm's-length McOpCo would provide McDonald's with ■ A better understanding of the true economic impact of its new products on the typical owner/operator's bottom line More credibility when communicating impact of new products to franchisees Franchisee participation on the McOpCo Board will temper any perception that McOpCo receives "preferential treatment" from McDonald's ► 80% ownership of McOpCo would preserve McDonald's "skin in the game" Bottom-lined focused McOpCo would be influential in endorsing new products 33#34D A Revised Proposal for Creating Value at McDonald's Final Revised Proposal.ppt Addressing Potential Franchisee Questions Question: Would a publicly traded McOpCo be an aggressive competitor to franchisees, given its need to grow its business for the benefit of its new shareholders? Answer: No, quite the opposite. We believe a more likely scenario is the following: McOpCo, no longer supported by corporate subsidies, will price more optimally Refranchising program will remove McOpCo as a competitor in many key markets McOpCo's most attractive growth plan is to focus on emerging markets where the franchise base is still in its infancy, such as China and Russia Question: Under your Revised Proposal, is there any risk that McDonald's real estate will be sold or that franchisees will experience unexpected rent hikes? Answer: No. We have never endorsed the sale of real estate or the creation of a REIT. We don't believe it's the right operational move We are confident management is not inclined to sell the real estate 34#35D A Revised Proposal for Creating Value at McDonald's Final Revised Proposal.ppt Addressing Potential Franchisee Questions Question: How will this change a franchisee's day-to-day interaction with McDonald's Corporation? Answer: There will be no changes. A franchisee's day-to-day interaction with McDonald's will not be affected by the creation of a publicly traded McOpCo. However, the franchisee community may find a strong ally in a publicly traded McOpCo McOpCo's management will be able to push back on lower margin / low return new products introduced by Corporate McDonald's McOpCo will improve the check and balance mechanisms in the system ✓ Testing at McOpCo on new products will be a better benchmark for how a product will perform throughout the system Many McOpCo stores in the U.S., Canada and U.K. will be up for refranchising ✓ Franchisee representation on McOpCo's Board will improve McOpCo's credibility and communication with the system 35#36D A Revised Proposal for Creating Value at McDonald's Addressing Potential Company Questions Final Revised Proposal.ppt Question: Would a publicly traded McOpCo hinder the current “Farm Team" system or inhibit McDonald's ability to recruit top McOpCo managers to work at Corporate? Answer: No. We believe the creation of a publicly traded McOpCo will actually improve the talent pool at both Brand McDonald's and McOpCo. ✓ Offering direct equity compensation in McOpCo will Attract "best-in-class" operators Improve retention Arm's-length, publicly traded McOpCo is better training ground than the current wholly owned McOpCo ▶ Better "real world" business discipline for managers, once corporate subsidies are removed Teaches restaurant operators how to run a public business With 80% ownership, Brand McDonald's will still be able to leverage its deep relationship with McOpCo for recruiting purposes 36#37D A Revised Proposal for Creating Value at McDonald's Current Issue Transparent financials A publicly traded McOpCo would increase financial transparency and would allow investors to appropriately value McDonald's on a sum-of-the-parts basis. Dividends and Equity Options Unlocking Shareholder Value Valuation Final Revised Proposal.ppt Benefits of the Revised Proposal ✓ Separate arm's-length McOpCo financials would be made available to investors ✓ Transparent segment financials would be made available at McDonald's, demonstrating the operating cash flows generated by Brand McDonald's Ability to increase dividends ✓ Reduce option dilution at McDonald's through the use of McOpCo currency ✓ McOpCo IPO would allow Wall Street analysts and the broad investment community to value McDonald's on a sum-of-the parts basis Investors would focus more on the value of Brand McDonald's 37#38D A Revised Proposal for Creating Value at McDonald's Based on an approximate $48 sum-of-the-parts value for McDonald's Brand McDonald's operating metrics and business characteristics (100% royalty-based revenues, low cost of capital and high earnings stability) are much closer to high branded intellectual property businesses such as PepsiCo, Coca-Cola or Choice Hotels or a typical Real Estate C-Corporation than they are to a typical QSR. We believe Brand McDonald's could be worth 12.5x13.5x EV/2006E EBITDA. 2005E Operating Metrics: EBITDA Margins EBITDA - CapEx Margins Long-term EPS Growth (2) Business Characteristics: Maint. Capital Requirements Earnings Stability Average Cost of Capital Fixed Asset Value Trading Multiples Adjusted Enterprise Value (³) / CY 2006E EBITDA CY 2006E EBITDA - CapEx Revised Proposal: Allows Investors to Value on a Sum-of-the-Parts Basis Brand McDonald's 60% 50% 9% Low High Low High 13.0x 15.5x Typical Real Estate C-Corp -70% - 80% -65% -75% ΝΑ Low High Low High ~13x - 16x ~17x - 20x Choice Hotels 66% 61% 16% Low High Low Low 19.1x 20.3x PEPSICO 23% 18% 11% Low High Low Low 12.2x 15.4x Coca-Cola 31% 27% 9% Low High Low Low 12.0x 13.6x Final Revised Proposal.ppt Typical Mature QSR (1) ~15% - 20% -7.5% -12.5% -10% -12% Medium Medium Medium Low ~8.5x - 9.5x ~12x - 15x Stock prices as of 1/13/2006. Projections based on Wall Street research estimates. Analysis assumes a 7x EV/EBITDA valuation multiple for McOpCo. (1) Typical mature QSR business characteristics based on YUM! Brands and Wendy's. (2) Brand McDonald's long-term EPS growth rate is based on the Company's current dividend payout ratio and assumes excess free cash flow after dividends is used for share buybacks. (3) Adjusted for unconsolidated assets. 38#39O A Revised Proposal for Creating Value at McDonald's ($ in millions) We believe a minority IPO of McOpCo would force a market revaluation of McDonald's. Segment McOpCo Brand McDonald's Total Note: (1) As Reported 2006E EBITDA $2,503 3,090 $5,594 Revised Proposal: Allows Investors to Value on a Sum-of-the-Parts Basis Adjusting for a Market Rent and Franchise Fee 2006E EV/'06E EBITDA Enterprise EBITDA Multiple Value $1,130 4,464 5,594 Recent Stock Price 7.0x 9.3x 8.9x Implied multiple, based on a $34 stock price $7,908 41,675 $49,582 $34.00 IPO of 20% of McOpCo and Transparency Drives Revaluation EV/'06E EBITDA Enterprise Multiple Value Low Final Revised Proposal.ppt High 7.0x 7.0x 12.5x 13.5x Implied Share Price Premium to Unaffected Price (1) Low High $7,908 $7,908 55,799 60,263 $63,707 $68,171 $46 45% $50 57% Assumes $1.25bn of proceeds from IPO and $1.75bn of existing cash on hand used to repurchase shares. Capital structure assumptions are detailed on page 56 of the Appendix. Analysis is pro forma for a McOpCo spin-off and McDonald's share buyback on 12/31/05. Based on 10/31 closing price of $31.60. 39#40D A Revised Proposal for Creating Value at McDonald's Assuming McOpCo pays a market rent and franchisee fee, we have modeled McOpCo FY '06E EBITDA of $1.1 billion and Brand McDonald's FY '06E EBITDA of $4.5 billion. Based on these assumptions, we believe McDonald's stock price would trade in the range of approximately $46 - $50 per share, as a result of a 20% IPO of McOpCo. McDonald's Sum-of-the-Parts Analysis at Various Multiples Assuming Transparent Segment Financials McDonald's Equity Value per Share Brand McDonald's EV/2006E EBITDA McOpCo EV / '06E EBITDA Multiple 12.0x 12.5x 13.0x 13.5x 6.0x $42.97 $44.86 $46.74 $44.86 $46.74 $48.62 6.5x 43.45 45.33 47.21 49.10 7.0x 43.93 45.81 47.69 49.57 7.5x 44.40 46.28 48.17 50.05 Final Revised Proposal.ppt Note: Assumes 75% of consolidated G&A is allocated to Brand McDonald's, with the rest allocated to McOpCo. Assumes McDonald's FY '05E Net Debt of $8.1bn, Minority Interest in McOpCo of $1.3bn, and FY'05E Diluted Shares Outstanding of 1,186mm, all pro forma for Pershing's Revised Proposal. 40#41A Revised Proposal for Creating Value at McDonald's Stock Price Pershing believes that McDonald's, pro forma for the McOpCo 20% IPO, would have a 2006E Free Cash Flow yield of 4.3 % -4.7% at stock price in the range of $46 - $50 per share. We note our Free Cash Flow calculation is based upon our estimates of 2006E After-Tax Levered Operating Cash Flow less Growth and Maintenance Capital Expenditures. (1) 2006E FCF Yield Current $34 McDonald's Free Cash Flow Yield Analysis McDonald's 2006E FCF/Dividend Yield at Varous Stock Prices Projected $47 $48 $49 6.3% Final Revised Proposal.ppt $46 41 4.7% (1) FCF Yield is based on Attributable Free Cash Flow before dividend payments. See Appendix page 54 for a calculation of FY 2006E Attributable Free Cash Flow. $50 4.6% 4.5% 4.4% 4.3%#42D A Revised Proposal for Creating Value at McDonald's M McOpCo Minimal Execution Risk Final Revised Proposal.ppt A minority IPO of McOpCo would have minimal execution risk and negligible frictional costs ✓Simple transaction. ✓ Many successful value creating precedent transactions ✓ Minimal management distraction ✓ Frictional costs of roughly 5 cents per share ✓ Preserves current structure's control of McOpCo McDonald's would maintain the flexibility to repurchase minority McOpCo stake ✓...if desired improvements were not obtained ✓ Minority buyouts are simple and common transactions with minimal transaction costs 42#43O A Revised Proposal for Creating Value at McDonald's Further Upside to Our Valuation Final Revised Proposal.ppt Pershing's valuation is based on the business as it exists today, assuming no further operational improvements. ► Pershing believes that creating a publicly traded arm's-length McOpCo will substantially improve both top-line and bottom-line performance of McDonald's ■ We believe that McOpCo has EBITDA margins of roughly 7.3% (post corporate allocation) (1) Based on comparable restaurant businesses, we believe McOpCo is capable of achieving at least 10% EBITDA margins ► However, Pershing has assumed no incremental operational improvements as part of its valuation We also see potential G&A improvement as an additional opportunity Standalone McDonald's LTM 9/30/05 G&A per systemwide unit of $68k versus YUM! Brands LTM 9/30/05 G&A per systemwide unit of approximately $35k We have not included an IPO / potential spin-off of Chipotle as part of our analysis ► IPO and potential spin-off of Chipotle will create additional value for investors (1) McOpCo EBITDA margins are after adjusting for a market rent and franchise fee and allocating 25% of McDonald's consolidated G&A to McOpCo. 43#44O A Revised Proposal for Creating Value at McDonald's McDonald's Potential Stock Price $60 $50 $40 $30 ed We believe our Proposal can potentially increase McDonald's share price to $50 per share. In addition, we believe McDonald's strong management team, running a world-leading brand, can create significant additional value based only on incremental operating improvements.(¹) $61 $50 Further Upside to Our Valuation (cont'd) Pershing Proposal: McOpCo 20% IPO and Market Revaluation of McDonald's $52 $56 Final Revised Proposal.ppt McOpCo improves EBITDA margins to 10% (approx. 275bps improvement) See Appendix page 55 for more detail regarding our assumptions on operating improvements. Total savings denotes consolidated G&A, of which 75% is allocated to Brand McDonald's and 25% is allocated to McOpCo. 44 Improve G&A to $50k per systemwide unit (~$500mm of G&A savings) (2) Recent: $34 Improve G&A to YUM! levels of $35k per systemwide unit (~$1bn of G&A savings)(2) Upside Pershing Proposal#45D A Revised Proposal for Creating Value at McDonald's ✓ A Plan to Win / Win Addresses concerns of all stakeholders Creates financial transparency for investors Will lead to substantial value creation for McDonald's shareholders Final Revised Proposal.ppt Simple transaction Minimal execution risk, management distraction and frictional costs Positions McOpCo to make optimal capital allocation and business execution decisions Improves the System's "checks and balances" Allows McDonald's maximum control and flexibility regarding future strategic alternatives Significant upside, given strong Management team 45#46Q & A#47Appendix#48Appendix Sales by Company Operated Restaurants Rent from Franchise and Affiliate Rest. Franchise Fees From Franchise and Affiliate Rest. Total Revenue Set forth below is a table which reconciles McOpCo's, Brand McDonald's and stand-alone McDonald's FY 2004 income statements, as they are currently reported. The analysis demonstrates how McOpCo is paying neither a market rent nor a franchise fee. Company Operated Expenses: Food and Paper Compensation & Benefits Occupancy and Other Expenses (excl. D&A) Company Operated D&A Total Company Operated Expenses Franchised Restaurant Occupancy Costs Franchise PPE D&A Corporate G&A EBIT 2004 McDonald's P&L As Reported Depreciation & Amortization EBITDA % of Total EBITDA 2004 Income Statement $14,224 3,336 1,505 $19,065 4,853 3,726 2,747 774 $12,100 576 427 1,980 3,982 1,201 $5,183 100% McOpCo P&L $14,224 $14,224 4,853 3,726 2,747 427 $11,753 495 1,976 427 $2,403 46% Brand McDonald's P&L 3,336 1,505 $4,841 347 $347 576 427 1,485 2,006 Final Revised Proposal.ppt 774 $2,780 54% 2004 Consolidated Sum of Parts $14,224 3,336 1,505 $19,065 4,853 3,726 2,747 774 $12,100 576 427 1,980 3,982 1,201 $5,183 100% The analysis assumes that 75% of the total G&A is allocated to the Brand McDonald's and 25% is allocated to McOpCo. To the extent that there should be more G&A allocated to McOpCo, then there would be a greater percentage of total EBITDA at Brand McDonald's than what is shown here. Note: Analysis excludes $441 mm of non-recurring other net operating expenses. 48#49Appendix Sales by Company Operated Restaurants Rent from Franchise and Affiliate Rest. Set forth below is a table which reconciles McOpCo's, Brand McDonald's and stand-alone McDonald's FY 2004A income statements, assuming McOpCo pays a market rent and franchise fee. The analysis demonstrates that the Brand McDonald's contributed approximately 78% of total EBITDA. Rent From Company Operated Rest. Franchise Fees From Franchise and Affiliate Rest. Franchise Fees From Company Operated Rest. Total Revenue Company Operated Expenses: Food and Paper Compensation & Benefits Non-Rent Occupancy and Other Expenses (excl. D&A) Company Operated D&A Company-Operated Rent Expense Additional Rent Payable to PropCo Franchise Fee Payable to FranCo Total Company Operated Expenses Franchised Restaurant Occupancy Costs Franchise PPE D&A Corporate G&A EBIT Reconciling McDonald's 2004A P&L Depreciation & Amortization EBITDA % of Total EBITDA 2004 Income Statement $14,224 3,336 1,505 $19,065 4,853 3,726 2,164 774 583 $12,100 576 427 1,980 3,982 1,201 $5,183 100% McOpCo P&L $14,224 $14,224 4,853 3,726 2,164 427 583 697 569 $13,019 495 710 427 $1,137 22% Brand McDonald's P&L 3,336 1,280 1,505 569 $6,690 347 583 $930 576 427 1,485 3,272 774 $4,046 78% Inter-Company Eliminations (1,280) (569) ($1,849) (583) (697) (569) ($1,849) Final Revised Proposal.ppt $0 2004 Consolidated Sum of Parts $14,224 3,336 1,505 $19,065 4,853 3,726 2,164 774 583 $12,100 576 427 1,980 3,982 1,201 $5,183 100% The analysis assumes that 75% of the total G&A is allocated to Brand McDonald's and 25% is allocated to McOpCo. McDonald's management has indicated that this is a conservative assumption regarding the real estate and franchise business. Note: Analysis excludes $441 mm of non-recurring other net operating expenses. 49 ↑↑#50Appendix For modeling purposes, we have assumed a 20% IPO of McOpCo and the proposed share repurchases occurred on 12/31/2005. In addition to our IPO assumptions, set forth herein are assumptions regarding share repurchases, capital structure and dividend policy. Final Revised Proposal.ppt Revised Proposal: Preliminary Transaction Assumptions IPO assumptions ► 20% IPO of McOpCo generates $1.25bn of cash proceeds after expenses (on 12/31/2005) ■ Assumes a 7x EV/'06E EBITDA multiple for McOpCo No taxes paid given McOpCo's basis which is assumed to be approx. $1.65bn Tax basis is equal to $3 billion of initial assumed basis (based on an assessment of net equipment and other property at McDonald's) less $1.35 billion of net debt Share repurchases Approximately 7% of the share base repurchased using ~ $1.75bn of expected cash on hand at the end of the year (after paying dividends) ~ $1.25bn of IPO proceeds, net of fees Capital structure post share repurchases Per management guidance, assumes McDonald's issues a $3bn term loan to repatriate foreign earnings No incremental debt issued at McDonald's over total debt at 9/30/2005 ($8.1bn), excluding a $3bn term loan required to repatriate earnings Assumes FY'05E Net Debt at consolidated McDonald's of $8.1bn ■ FY'05E Total Debt of $11.1bn, which includes $3bn of debt required for the repatriation of foreign earnings ■ FY'05E cash balance of $3bn, based on proceeds received from repatriation Increase dividend payout ► Increase dividend payout ratio to 90% 50#51Appendix Step 1: McOpCo dividends a $1.3bn Note to McDonald's (parent) $1.3bn Note M McDonald's McOpCo ► McOpCo declares and pays a dividend to McDonald's (parent) in the form of a Note in an amount equal to the anticipated proceeds from an initial public offering of McOpCo ► For illustrative purposes, we assume the Note is for $1.3bn, or 20% of the equity market value of McOpCo (assumed to be $6.6bn) McOpCo IPO: Mechanics IPO of McOpCo Shares Step 2: IPO of McOpCo McDonald's retains 80% stake Equity Markets McOpCo McDonald's $1.3 bn cash received McOpCo repays $1.3 bn Note to McDonald's ► McOpCo undertakes the IPO and uses the proceeds to repay the dividend note. ► Any tax cost for the IPO would be the amount by which the IPO distribution exceeded McDonald's basis in the McOpCo stock multiplied by McDonald's corporate and state/local tax rate 51 Assuming a $1.3bn of IPO distribution, there would be no tax cost associated with the IPO ■ Assume a $1.65 billion of tax basis Step 3: Share Repurchases using Cash on Hand and IPO Proceeds Pays $3.0 billion Equity Markets Final Revised Proposal.ppt McDonald's Repurchases shares ■ Excess cash on hand ■ After tax proceeds of IPO McDonald's performs a self-tender post the IPO No incremental leverage issued ► PF McDonald's repurchases approximately 7% of the fully diluted share base using#52Appendix Given the estimated tax basis in McOpCo, we believe that no taxes would need to paid in an IPO of McOpCo. McOpCo IPO: Proceeds Taxes payable McOpCo Equity Market Value IPO Percentage Distribution to PF McDonald's Estimated Book Basis of McOpCo Net Debt Allocated to McOpCo Adjusted Basis in McOpCo Taxable Gain McOpCo IPO After Tax Proceeds Low Tax Rate Taxes payable After Tax Proceeds Distribution Taxes Payable After Tax Distributions Estimated IPO fees Net Proceeds 52 $5,993 20% $1,199 3,000 (1,350) 1,650 $0 38% $0 $1,199 0 $1,199 (60) $1,139 High $7,122 20% $1,424 3,000 (1,350) 1,650 $0 38% $0 $1,424 0 $1,424 (71) $1,353 Final Revised Proposal.ppt Average $6,558 20% $1,312 3,000 (1,350) 1,650 $0 38% $0 $1,312 0 $1,312 (66) $1,246#53Appendix Set forth herein are the schedules for (1) FY 2005E funds available for proposed share buybacks; (2) '05E Total Debt Balances; and (3) '05E Cash Balances. We have assumed that no incremental debt would be issued at McOpCo as of 9/30/2005 on top of the estimated $3 billion required to repatriate earnings from foreign territories. McDonald's Cash and Debt Schedules: No Incremental Debt Issued Post 9/30/2005 $ in millions Pre-IPO Cash Available to Fund Share Buybacks: Beginning Cash Balances 1/1/2005 Plus: FY'05E Free Cash Flow Before Dividends and Debt Pay Down Less: FY'05E Debt Reduction Less: FY'05E Dividends Equals: FY 2005E Cash on Books Available for Share Buybacks FY 2005E Total Debt Balance: Beginning Total Debt Balances 1/1/2005 Less: FY'05E Debt Reduction Estimated New Term Loan to Fund Repatriation Total Debt FY 2005E Post IPO FY 2005E Cash Balance: Beginning Cash Balances 1/1/2005 Plus: FY'05E Free Cash Flow Before Dividends and Debt Paydown Less: FY'05E Debt Reduction Less: FY'05E Dividends Plus: Estimated IPO Proceeds, net of fees Less: Share buybacks Plus: Proceeds from Repatriation FY 2005E Ending Cash Balance FY 2005E Net Debt Final Revised Proposal.ppt 53 $1,380 2,351 (1,155) (843) $1,733 $9,220 (1,155) 3,000 $11,065 $1,380 2,351 (1,155) (843) 1,246 ($2,979) 3,000 $3,000 $8,065#54Appendix Set forth herein is a schedule for 2006E Free Cash Flow based on our estimates. Attributable free cash flow per share deducts the minority interest free cash flow pertaining to the 20% stake of McOpCo's no longer owned by McDonald's. FY2006E shares outstanding is pro forma for the proposed share buyback. McDonald's 2006E Free Cash Flow Assuming a 20% IPO of McOpCo 2006E Cash Flow Data ($ in mm except per share data) EBITDA less: Cash Taxes less: Cash Interest Expense less: Growth CapEx (Net of Proceeds from Closings) less: Maintenance CapEx less: Change in Working Capital less: Minority Interest Free Cash Flow Attributable Free Cash Flow Before Financing Activities FY 2006E Average Shares Outstanding (mm) Attributable Free Cash Flow per Share Dividends Paid at 90% of Attributable FCF Dividend Paid per Share 54 Final Revised Proposal.ppt $5,594 (1,186) (563) (316) (943) 12 (74) $2,525 1,176 $2.15 2,272 $1.93#55Appendix Set forth herein is a table which details our assumptions regarding potential operating improvements. Assumptions: Upside Operating Improvements Transaction / Assumptions McOpCo EBITDA Improvement 275bps FY 2006E Financial Data: McOpCo Revenue McOpCo EBITDA Current EBITDA Margin New Margins New McOpCo EBITDA G & A Savings: Improving to $50k per unit Unit Level Assumption: -50k per unit G&A Allocation Assumptions: McOpCo Brand McDonald's Savings ($ in mm) McOpCo Brand McDonald's -35k per unit G&A Allocation Assumptions: McOpCo Brand McDonald's $15,429 $1,130 7.3% 10.1% 1,554 G & A Savings: Improving to YUM! Levels Unit Level Assumption: Savings ($ in mm) McOpCo Brand McDonald's 55 25.0% 75.0% $125 $375 25.0% 75.0% $250 $750 Segment McOpCo Brand McDonald's Total McOpCo Brand McDonald's Total Pr Forma 2006E EBITDA Less: FY'05E Net Debt Less: Minority Interest (Market Value) Equals: Market Value of Equity PF FY'05E Diluted Shares Outstanding (mm) Estimated Share Price $1,554 4.464 6,018 McOpCo Brand McDonald's Total $1,679 4,839 6,518 Less: FY'05E Net Debt Less: Minority Interest (Market Value) Equals: Market Value of Equity PF FY'05E Diluted Shares Outstanding (mm) Estimated Share Price $1,804 5,214 7,018 Less: FY'05E Net Debt Less: Minority Interest (Market Value) Equals: Market Value of Equity PF FY'05E Diluted Shares Outstanding (mm) Estimated Share Price Estimated EV/'06E EBITDA Multiple 7.0x 13.5x 7.0x 13.5x 7.0x 13.5x Final Revised Proposal.ppt Pro Forma Enterprise Value $10,878 60,263 $71,141 8,065 1,906 $61,171 1,186 $52 $11,753 65,326 $77,078 8,065 2,081 $66,933 1,186 $56 $12,628 70,388 $83,016 8,065 2,256 $72,696 1,186 $61#56Appendix Set forth herein is a table which details our sum-of-the-parts valuation. Note: (1) ($ in millions) Segment McOpCo Brand McDonald's Total Less: FY'05E Net Debt Less: Minority Interest (Market Value) Equals: Market Value of Equity PF FY05E Diluted Shares Outstanding Valuation Assumptions Recent Stock Price Adjusting for a Market Rent and Franchise Fee 2006E EV/'06E EBITDA Enterprise EBITDA Multiple Value $1,130 4,464 5,594 7.0x 9.3x 8.9x Recent Stock Price $7,908 41,730 $49,638 6,332 $43,306 1,274 $34.00 56 EV/'06E EBITDA Multiple Low 7.0x 12.5x IPO of 20% of McOpCo and Transparency Drives Revaluation High 7.0x 13.5x Implied Share Price Premium to Unaffected Price (1) Final Revised Proposal.ppt Enterprise Value Low High $7,908 $7,908 55,799 60,263 $63,707 $68,171 8,065 1,312 $54,331 1,186 $46 45% 8,065 1,312 $58,794 1,186 $50 57% Assumes $1.25bn of proceeds from IPO and $1.75bn of existing cash on hand used to repurchase shares. Analysis is pro forma for a McOpCo spin-off and McDonald's share buyback, as proposed, occurring on 12/31/05. Based on 10/31 closing price of $31.60.#57Appendix ($ in thousands) Set forth herein is a table which details our assumptions regarding average unit level 4-Wall EBITDA margins for McOpCo and U.S. Franchisees. Avg. Unit Sales Operating Income Before Rent Expense Less: Market Rent & Franchisee Fee Operating Income after Rent and Franchise Fee Average Unit Level EBITDA Margins Plus: Estimated D&A 4-Wall EBITDA (w/ Mkt. Fees) Avg. US McOpCo Unit $1,912 $433 249 $185 57 $242 100.0% 22.7% 13.0% 9.7% 3.0% 12.7% Avg. Intl. McOpCo Unit $1,494 $281 194 $87 45 $132 100.0% 18.8% 13.0% 5.8% 3.0% 8.8% Note: McOpCo estimates based on FY 2004 financial data and assumes 2,002 U.S. McOpCo units and 6,117 International McOpCo units. (1) As presented by Ralph Alvarez, President of McDonald's North America, at McDonald's Analyst Meeting at Oak Brook, IL on 9/21/05. 57 Avg. US Franchisee Unit $1,762 Final Revised Proposal.ppt $260 (1) 100.0% 14.8%#58Case Studies $50 $45 $40 $35 $30 $25 $20 $15 $10 1/19/99 10/1/99 6/12/00 McDonalds 7 Year Stock Price Performance: January 1999 to present 2/22/01 11/4/01 7/17/02 58 чатыры 3/29/03 12/9/03 Final Revised Proposal.ppt 8/20/04 $48 11/12/1999 5/2/05 1/13/06