Fund seeks con­trol of Yum China

China Daily (Canada) - - ACROSS AMERICAS - By WANG ZHUOQIONG in Bei­jing wangzhuo­qiong@chi­nadaily. com.cn

A con­sor­tium backed by sov­er­eign fund China In­vest­ment Corp has ex­pressed in­ter­est in buy­ing a ma­jor­ity stake in Yum Brands Inc’s China busi­ness, which runs more than 7,100 KFC and Pizza Hut eater­ies across the country, Bloomberg re­ported on Tues­day.

KKR & Co, a firm re­ported to be in the con­sor­tium, said in an e-mail to China Daily that it was “un­able to com­ment on mar­ket spec­u­la­tion”.

The in­vestor group, which also in­cludes Bar­ing Pri­vate Equity Asia, is con­duct­ing due dili­gence on the unit, the re­port said. A deal could value Yum China at $7 bil­lion to $8 bil­lion, Bloomberg quoted un­named sources as say­ing.

Yum told China Daily: “We con­tinue to make good progress since we an­nounced the trans­ac­tion sep­a­rat­ing Yum and Yum China into two pow­er­ful, in­de­pen­dent, fo­cused growth com­pa­nies. We will pro­vide up­dates on the trans­ac­tion at ap­pro­pri­ate times and we won’t com­ment on ru­mors or spec­u­la­tion.”

A ma­jor­ity pur­chase by the CIC con­sor­tium would give a do­mes­tic en­tity con­trol of a lead­ing fast-food chain in the Chi­nese mar­ket for the first time.

It also would pro­vide the Louisville, Ken­tucky-based Yum with cash that could be used to fund a div­i­dend and its planned share-buy­back, as well as help re­duce ex­po­sure to a busi­ness with shrink­ing mar­ket share.

The China-backed in­vestor group is in­ter­ested in buy­ing as much as 100 per­cent of Yum China. Yum is con­sid­er­ing all op­tions, though it may still de­cide to pur­sue the sale of a mi­nor­ity stake or pro­ceed with an an­nounced tax-free spinoff of the busi­ness, ac­cord­ing to sources fa­mil­iar with the mat­ter.

Ja­son Yu, gen­eral man­ager of Kan­tar World­panel China, said for CIC, it can ben­e­fit from the scale and pres­ence of Yum in China to ex­tract more value by re­view­ing the costs and iden­tify key value driv­ers or re­struc­tur­ing the busi­ness. This will de­liver longert­erm re­turn for the sov­er­eign wealth fund, Yu said.

“I be­lieve they can still ex­tract value from a trou­bled busi­ness unit. If they can help them re­set the busi­ness strat­egy, fo­cus and port­fo­lio, they can ben­e­fit from the re­cov­ery.”

He said Yum can gain from the fi­nan­cial re­sources pro­vided by CIC and other pri­vate equity com­pa­nies to up­grade their stores and in­no­vate their of­fers as well as ex­pand their port­fo­lios to more cities in China.

“The cash sup­port will pro­vide much needed re­sources while they don’t have com­pro­mise on short-term in­vestor pres­sure,” said Yu.

Yum bowed to ac­tivistin­vestor pres­sure in Oc­to­ber and agreed to sep­a­rate its China busi­ness from its US oper­a­tions. Hedge fund man­ager Keith Meis­ter, a protege of bil­lion­aire Carl Ic­ahn, said Yum’s Asian mar­ket could be bet­ter served with a more fo­cused busi­ness.

China ac­counted for about 53 per­cent of Yum’s rev­enue last year, data com­piled by Bloomberg show. Yum’s China divi­sion con­trib­uted 57 per­cent of over­all com­pany rev­enue and 54 per­cent of its op­er­at­ing profit in the lat­est quar­ter.

Still, Yum has seen its mar­ket share con­tin­u­ously drop from 39.8 per­cent in 2012 to 32.7 in 2013, 28.3 in 2014 and 23.9 per­cent in 2015.

The sec­ond-largest fast­food chain in China, McDon­ald’s Corp, has seen its shares de­cline from 14.9 per­cent in 2012 to 13.8 per­cent in 2015.

Last month, McDon­ald’s China an­nounced it was on the look­out for strate­gic in­vest­ment part­ners in the main­land to help it open an­other 1,000 restau­rants by 2020.

The cash sup­port will pro­vide much needed re­sources while they don’t have com­pro­mise on short-term in­vestor pres­sure

Bloomberg con­trib­uted to this story.

ALY SONG / REUTERS

A man walks past a logo of KFC, out­side a restau­rant in Shang­hai.

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