Yum Brands Caves to Corvex, Will Spin off China Business

Oct 20 2015 | 1:59pm ET

By Sruthi Ramakrishnan (Reuters) - KFC owner Yum Brands said it plans 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 percent on Tuesday.

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, a protégé of billionaire investor Carl Icahn, had been pushing for a reorganization for many months and was appointed to Yum's board last week. His hedge fund Corvex Management owns nearly 5 percent of the company.

The China business, which contributed 57 percent to Yum's total revenue, will be headquartered in Shanghai. Sales in the business have fallen in the past four of the five quarters.

The company cut its full-year profit forecast on Oct. 6 due to weak sales in China, sending its shares crashing 19 percent on that day.

"Yum Brands is being tainted by the China business, so 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.

Investors will now look for details on the royalty rate Yum Brands will charge the China business, and how it will lever up its balance sheet and spend the new pot of cash.

Yum said on Tuesday it was on track to open about 700 new restaurants in China this year with a target of opening over 20,000 restaurants in the future.

In Depth

PAAMCO: Will Inflation Deflate the Asset Bubble?

Jan 30 2018 | 9:49pm ET

As the U.S. shifts from monetary stimulus to fiscal stimulus, market pricing should...


CFA Institute To Add Computer Science To Exam Curriculum

May 24 2017 | 9:25pm ET

Starting in 2019, financial industry executives sitting for the coveted Chartered...

Guest Contributor

Boost Hedge Fund Marketing ROI By Raising Your ROO

Feb 14 2018 | 9:57pm ET

Tasked with delivering returns on client capital, a common dilemma for many alternative...