Yum Brands

Yum Brands, Parent Company of Taco Bell and KFC, Is Spinning Off Its China Business

Yum Brands, Parent Company of Taco Bell and KFC, Is Spinning Off Its China Business
Image credit: Reuters | Aly Song

Yum Brands Inc said it intended to split off its China business, which has been besieged by food scandals and marketing missteps, bowing to pressure from an activist shareholder.

Yum's shares rose 4.6 percent in premarket trading.

Yum China will operate as a publicly traded company and become a franchisee of Yum Brands in mainland China, paying the parent a percentage of its sales for exclusive rights to three of the company's brands - KFC, Pizza Hut and Taco Bell.

The split will allow Yum Brands to focus on reenergizing its stagnating business in the United States as well as expand in emerging markets such as India. It will also give shareholders a steady stream of income from royalties while allowing Yum to take lease obligations off its balance sheet.

"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," activist investor Keith Meister told Reuters in an email.

Meister, whose hedge fund Corvex Management owns nearly 5 percent of the company, had been pushing for a reorganization for many months. He was appointed to its board last week.

Yum Brands entered China in 1987 through its KFC brand, making it one of the first U.S. fast-food chains to set up operations there.

For years, the China business took the lead in driving sales for the company as a growing middle class frequented the restaurants that customized menus for the Chinese palate.

Sales have, however, faltered in the past several quarters as the business has been beset by multiple problems ranging from a meat scandal to marketing missteps, coupled with a slowing economy that has made eating out less popular.

"Yum Brands will trade at a higher multiple because it's a better business now that it's not attached to Yum China," Hedgeye Risk Management analyst Howard Penney said.

The China business contributed 57 percent to Yum's total revenue and 54 percent to its operating profit in its latest quarter.

Yum Brands will be led by its current Chief Executive Greg Creed and Yum China will be led by Micky Pant, who was named the CEO of the China business in August.

The separation, which is expected to be completed by the end of 2016, is intended to be tax free to shareholders.

Goldman Sachs is the financial adviser to Yum Brands, while Wachtell, Lipton, Rosen & Katz and Mayer Brown are its legal advisers. PJT Partners is serving as an independent financial adviser to the company's board.

(Reporting by Sruthi Ramakrishnan in Bengaluru; Additional reporting by Yashaswini Swamynathan; Editing by Anil D'Silva and Sayantani Ghosh)

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