Yum Brands plans spinoff of struggling China business
Fast-food company was feeling pressure from activist investors to make move
Facing pressure from activist investors, Yum Brands announced Tuesday that it will spin off its China business.
The announcement comes after Yum Brands CEO Greg Creed told analysts this month the company would take “immediate action” and acknowledged its promised turnaround of its KFC and Pizza Hut brands in China has failed to take hold.
The possibility of a spinoff appeared all but a done deal last week after Yum announced it had named activist investor Keith Meister to the company’s board of directors. Meister, managing partner of Corvex Management, had been among the most vocal proponents of spinning off the China business. Meister has a 5% stake in Yum.
“Over the past year, our management and board have thoroughly evaluated a range of value-creating opportunities,” Creed said in a statement. “Following the separation, each stand-alone company will be able to intensify focus on its distinct commercial priorities, allocate its own resources to meet the needs of its business, and pursue distinct capital structures and capital allocation strategies.”
Yum shares closed at $73.03, up 1.8%. The company operates about 6,900 restaurants in China, including KFC, Pizza Hut and the Little Sheep hot pot chain. As part of the transition, Yum China will have the opportunity to launch Taco Bell, Yum’s strongest franchise in the USA, in China.
The transition is to be completed by the end of next year. The new China company is expected to have no significant debt, with substantial financial capacity to invest in its business, according to Yum.
The China businesses, which are about 93% company-owned, will pay a royalty fee to Yum Brands. Yum officials are still discussing with regulators in China and the U.S. what the tax implications of the deal could mean. The China business generates about $1 billion in operating cash flow and has been growing at about 700 new restaurants a year.
Yum Brands will continue to be led by Creed, and Yum China will be led by Micky Pant, who was named CEO of the China unit in August. The company said it will divulge more about its China strategy at its scheduled investors day conference in December.
Meister on Tuesday said the move would “maximize shareholder value.” “Yum has two great, but distinct, business models embedded in one company — a highly attractive franchise business model everywhere in the world beyond China, and a leading company-owned restaurant model within China,” Meister said in a statement. “The separation of these two businesses gives shareholders the choice to own a growing annuity-like franchise cash flow stream, as well as the leading restaurant concept in a country with the fastest-growing consumer class.”
Yum in China has been dealing with the aftermath of a pair of food-safety scares in China since 2012, including one in which a supplier sold Yum and other chains expired meat. The average China restaurant generates about $1.2 million in revenue, down from about $1.7 million before the food supplier incidents.