McDonald’s Has a Major New Problem on Its Hands

McDonald’s has a new group of investors pulling up to its drive-thru window. And they may soon be ordering changes.

Recently, a number of shareholder activists—hedge funds that typically push for companies to make changes, like splitting off divisions or buying back stock—have been loading up on shares of the fast-food giant. On Friday, Jana Partners reported in a filing that it had bought 125,000 shares of McDonald’s in the first quarter. The $11 billion hedge fund is run by Barry Rosenstein, who is one of the more aggressive shareholder activists. Last year, Jana won two board seats at drug store chain Walgreen, and it pressured PetSmart, along with another hedge fund, into selling itself to private equity firm BC Partners in one of the biggest deals of the year. Recently, Jana has bought a stake in Qualcomm, pushing for the telecommunications company to split off a chip division.

If Rosenstein does pick a fight with McDonald’s, he’ll have more than one not-so-silent partner. Also eyeing McDonald’s is Keith Meister, who runs Corvex Management. Corvex bought 205,000 shares of McDonald’s in the first quarter. Meister is a former right-hand man to Carl Icahn. But the activist who looks most likely to aggressively pursue McDonald’s is lesser known Larry Robbins. Robbins’ Glenview Capital bought 2.9 million shares of McDonald’s in the first quarter. Another hedge fund, Highfields Capital, which is led by sometimes activist investor Jonathan Jacobson, upped its stake in McDonald’s in the first quarter as well. That fund now owns nearly $1.4 billion worth of stock and options in the fast food chain.

McDonald’s has struggled lately (well documented by Fortune here). Its stock is down 5% in the past year and it has significantly lagged the market over the past three years. But it’s not clear what the activist play with McDonald’s might be. McDonald’s is already doing many of the things activists normally push for. Last year, the company said that it would return as much as $20 billion in cash to investors in the form of increased share buybacks and dividends. And it looks to be cutting costs and selling off assets. It also named a new CEO, Steve Easterbrook, in March. Earlier this month, Easterbrook announced a plan to reduce the company’s corporate overhead and sell off as many as 3,500 company-owned restaurants to franchisees. And the company only has $1.6 billion in cash, down $400 million in the first three months of the year alone, and $14 billion in debt, so it’s not clear it could boost buybacks.

Activist investors could push for McDonald’s to make change to its real estate portfolio. Activists Stocks, a finance newsletter that follows shareholder activism, recently wrote that “the real value lies in getting the company to spin its real estate off” into a real estate investment trust or a REIT.

But it’s not clear how much of a boost that would offer McDonald’s shares. According to its latest 10-k, McDonald’s says it has nearly $25 billion in land and buildings. Just $6 billion of that is in actual land. The rest of that $25 billion is the approximate value of its buildings and equipment, like signs, which would have much less value to another owner. McDonald’s market cap is over $90 billion, so the company’s real estate would have to fetch considerably more on its own to make a difference to shareholders.

It looks likely that McDonald’s would fight an effort to force it to sell off its real estate. In the past, McDonald’s has said that owning its real estate “enables us to achieve restaurant performance levels that are among the highest in the industry,” though the later part of that is debatable at this point.

But the fact that activists are circling McDonald’s shows, once again, that hedge funds are willing to go after bigger and bigger targets. And the fact that McDonald’s shares are struggling could make it a viable target. Qualcomm, Jana’s other recent target, has a market cap of nearly $115 billion.