McDonald's Japan has set its IPO price at the top end of expectations.  The Y4,300 per share price tag will make the McDonald's Japan IPO one of the largest initial listings on Tokyo's lethargic new issues market this year, raising money for its planned expansion. However, McDonald's Japan will need to deliver profitable results soon, as analysts question its chances of expanding profitably in the competitive fast food market.

McDonald's expansion plans will now receive the necessary funding from its IPO, which has just received an agreed initial listing price of Y4,300 per share. The company's listing on the JASDAQ will raise an expected Y51.6 billion ($412 million) from the sale of 12 million new shares, as well as another Y60.2 billion ($482 million) from the sale of 12.2 million existing shares. The IPO is the largest of its kind this year, coming amid a depressed new issues market.

The price of Y4,300 per share will put McDonald's on a multiple of 38.9 compared to one of its rivals, MOS Food Services, at a 27.2 multiple. The higher ratio is partly bolstered by the company's future earnings expectations, as well as good sentiment in the retail sector and the relatively low returns available from other investments. The company's shares are priced at the top end of their tentative price range of Y3,000 yen to Y4,300, reflecting brisk buying interest.

This funding is designated to fuel the expansion of outlets from the current 3,678 to 10,000 by the year 2010. Despite sales of just under Y360 billion last year, net profit has fallen 12% this year to Y123 million. However, the local company's growth history has been good which should offset the medium term trade-off in profits as it continues its expansion program.

Den Fujita, the president of McDonald's Japan, and his family now own 26.9% and the US parent owns 50% of the company. Although Mr Fujita is unlikely to resign before he delivers on his commitment to growth, he is already 75 years old. As a result, there is likely to be a change of leadership in the company soon.

Overall, while McDonald's Japan looks likely to grow with some success, it may have trouble justifying its high price to earnings ratio unless it gains profitability. The company will have to deliver rapidly on its growth promises to avoid a falling share price.

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