Yum Brands (YUM, Financial), the owner of KFC and Pizza Hut, has entered into a deal with Primavera Capital and an affiliate of Alibaba Group (BABA, Financial) to sell a part of its Chinese operations as the American restaurant giant plans to spin off its China business.
Primavera Capital, together with Ant Financial Services, will acquire a collective stake of $460 million in Yum Brand China.
The investment in Yum Brands China will be divided into two disproportionate parts where Primavera would invest $410 million and Ant Financial, which operates Alibaba’s Alipay mobile payments, would invest $50 million. The transaction is expected to complete by October, which means that from Nov. 1, Yum Brands will be trading independently on the New York Stock Exchange as YUM China. Here’s a closer look at the deal.
A closer look at the deal
Primavera and Ant Financial will buy shares at a discount of 8% calculated on the average share price trading between 31 days and 60 days post the distribution to Yum shareholders. It is expected that the ownership stake of two investors would range between 4% and 6%.
Both Primavera and Ant Financial believe that Yum China has strong fundamentals, has performed well in the past and has positive growth prospects in the Chinese economy. The two investors would get warrants in two tranches to purchase approximately 2% of the common stock of Yum China. The warrants can be exercised in a five-year period from the date of its issuance. This may increase the ownership of Primavera and Ant Financial to 10%.
While Yum China would be an independent entity, Yum Brands would receive a royalty of 3%. The fresh cash injected by the two investors would make Yum China debt-free with sufficient funds to finance future growth plans.
Looking ahead
Yum Brand has been China’s most popular restaurant company. It has made its entry in the Chinese market in 1987 and over the years witnessed huge success. However, KFC's food safety concerns in recent years hit the company’s top and bottom lines more than anticipated. The footfall rapidly fell, hitting the company’s sales from its most lucrative market. However, KFC has been recovering with sales moving up and cash flows improving.
The decision to spin off the China operation came in when Yum Brands came under pressure from its investors, including Corvex Management LP and Daniel Loeb’s Third Point LLC, as they stressed on overhauls.
As per the company’s announcement, Dr. Fred Hu, founder of Primavera, is preparing to become the nonexecutive chairman of the board of Yum Brands. Hu said: “We have long admired the Yum China business and are looking forward to collaborating with the board and management to realize the company’s full potential. Yum China is an established leader in the retail and restaurant industry, which we believe is poised for continued strong growth and unit expansion as cities across China invest in new transportation hubs, shopping malls and other physical and electronic infrastructure that will support consumption. I look forward to leading the board of directors of Yum China in its new and exciting chapter as an independent company.”
Primavera has a reputation for building successful, high-growth entities in the mainland that have a business offering that could make the most of the increasing urbanisation in the country. It would be interesting to see how fruitful the spinoff turns out to be. Besides Primavera and Ant Financial Services, China’s sovereign wealth fund and New York private equity firm KKR and Co. are also looking out to acquire a stake in Yum Brand.
Disclosure: I do not hold any position in the stock/s discussed in this article.
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