half year results, page-15

Hmm, it pays not to be too optimistic where franchising is concerned.

Franchising is a low cost way for the franchisor to expand. History is littered with examples of how successful franchisors eventually retake control of their brands. Just some names for thought- MacDonalds, Jurlique, and more recently Ralph Lauren.

For a more direct threat at home, I note that the jury is still out in relation to the court fight between Jack Cowin and Yum over expiring KFC franchises in WA. IMO Jack is in a poor position having regard to current legislation on franchising.

As to leases, whilst I have not read the Yum licensing agreement to CKF, any competent lawyer will include a clause requiring all leases to be assigned on termination of the franchise agreement. I have read some of these clauses myself. I will bet that the CKF Yum deal is really no different. In any case, what is CKF going to do with the sites even if they are not forced to assign the lease? They would have to strip the fitout and reconfigure for another use, if any.

What Yum decides to do in 19 years time is of course a matter of conjecture. But a franchisee does not have a good probability set to work with. If the brand is doing well, the franchisor will want to retake control. If the brand is not doing too well, you dont really want to extend the franchise anyway. Catch 22.

Having said that, if you model the cashflow over 19 years, you get quite an attractive bond-like investment spitting back cash of $20m per annum, if everything holds its current course. I would not bet on that.