China Sovereign Fund Seeks Control Of Yum! Brands' 7,100 KFC, Pizza Hut Restaurants In China

A Chinese consortium backed by China Investment Corp, a state-owned sovereign wealth fund, has expressed interest in buying a majority stake Yum! Brands Inc.'s businesses in China, which amounts to more than 7,100 KFC and Pizza Hut locations.

The CIC-backed group of investors includes private equity firms KKR & Co., Hopu Investments, and Baring Private Equity Asia, among others. Yum! Brands notably owns Taco Bell, Pizza Hut and KFC, as well as Long John Silver's and A&W. A deal to gain control of the fast food giant's China unit could be worth a whopping $7 to $8 billion, anonymous sources close to the deal told Bloomberg.

"The China-backed investor group is interested in buying as much as 100 percent of Yum China, two of the people said. Yum is considering all options, though it may still decide to pursue the sale of a minority stake or proceed with a previously announced tax-free spinoff of the business, according to the people. The company isn't currently running a formal sale process, one of the people said."
A majority stake in Yum! Brands China would give domestic companies control of the leading fast food chains in the country for the first time; locally-owned chains in China continue to lag behind foreign companies like KFC, which has been the most popular fast food chain in China since it first opened in Beijing in 1987. To put the disparity in perspective, Hua Lai Shi Catering Management & Service Co., a Chinese fast food business and largest domestic operator with 3,000 outlets, had a three percent market share to Yum! Brands' 24 percent.

If such a huge deal went through, Yum! could also use the cash for dividends and buybacks. Singapore's state fund Temasek Holdings Pte and Chinese private equity firm Primavera Capital Ltd. are also separately seeking stakes in the China division.

According to Reuters, Yum! China accounts "for about half of the company's total sales, by the end of 2016. Yum China would list on the New York Stock Exchange, and possibly in Hong Kong." Nevertheless, Bloomberg noted that Yum! saw its formerly most profitable branch plummet in 2010, and is currently looking to spin off its China holdings.

"Yum has lately seen its dominance in the world's second-largest economy wane, as its market share in the country has fallen from 39 percent in 2010, Euromonitor data show. The company plans to add 600 outlets this year to its more than 7,100 restaurants across China, according to its website."
China accounted for approximately 53 percent of Yum! Brands' revenue last year. A representative from Yum! Brands said in a statement sent over email to Bloomberg that the company is making "good progress" since separating its China division in October.

"We continue to make good progress since we announced the transaction separating YUM and YUM China into two powerful, independent, focused growth companies," the spokesperson said to CNBC.

The company initiated the split under pressure from activist investor and hedge fund manager Keith Meister to reorganize its operations and focus its business in light of its China divisions' shrinking market share. The Economist characterized the reasons for Yum! China's downward trend.

"By last year operating profits in China were down to $757m. The company has been hit by recent food-safety scandals, which revealed that its local management lacked a good grip on its supply chain. It has also been hurt by a trend towards local and, perhaps, healthier fare. A recent survey of 10,000 consumers in 44 Chinese cities by McKinsey, a consultancy, found that 67% of respondents were eating Western fast food in 2012, but only 51% did so last year."
Yum! Brands Inc. is the world's largest restaurant company in terms of units, with 38,000 restaurants in over 120 countries and territories. Their brands Taco Bell, Pizza Hut, and KFC are the global leaders in their respective food categories of Mexican-style, pizza, and chicken restaurants.

CIC's press office did not immediately respond to an email requesting a comment, while Baring and KKR declined to comment on the potential deal.

"We decline to comment on market speculation," Temasek said over email.

[Photo by China Photos/Getty Images]