CIC-Led PE Consortium Mulling Purchase Of Controlling Stake in Yum Brands China

Apr 20 2016 | 10:32pm ET

By Denny Thomas, Saeed Azhar and Prakash Chakravarti (Reuters) - A group of investors comprising sovereign wealth fund China Investment Corp. (CIC), KKR and Baring Private Equity Asia is in talks to buy a controlling stake in Yum Brands's China unit, people familiar with the matter said.

Yum Brands, owner of the Pizza Hut and KFC fast food chains plans to spin off its 6,900 China restaurants by the end of 2016. The China unit accounts for about half of its parent's total sales and is valued at about $10 billion, based on its core earnings, bankers and analysts estimate.

The U.S.-based company had initially planned to sell a stake of about 20 percent in the China operation to anchor investors ahead of a planned listing of the business in New York Exchange and possibly in Hong Kong.

But the deal structure is being reworked as acquiring a minority stake is less appealing for buyout firms, making it difficult for them to secure debt funding to finance the deal. It wasn't immediately clear how much the investor group plans to pay for Yum's China business.

Bloomberg first reported the news and said the deal could value Yum China at between $7 billion-$8 billion.

According to people familiar with the transactions, speaking on condition of anonymity because the talks were confidential, it was unclear whether Yum would agree to sell a majority stake, as disposing of more than 20 percent of the China business would attract a higher tax bill.

Yum, still the largest fast food chain in China, has been losing ground to McDonald's as both strive to revive flagging sales in the teeth of growing competition from local rivals and a slowing economy.

McDonald's itself is changing its business model in Asia by planning to bring in partners to own a majority of its restaurants within a franchise operation.

Chinese diners once flocked to Yum outlets - and to McDonald's - helping drive revenue growth of nearly 30 percent a year between 2006 and 2012. But Yum's China sales dipped 0.4 percent in 2015, after two flat years, underlining how managers have struggled to repair its reputation since the food safety scares.

CIC, KKR and Baring declined to comment.

Yum said in a statement that it is making good progress since it announced the planned separation of Yum and Yum China and will provide updates on the transaction at appropriate times. It didn't comment on any potential deal with the group of investors.

Yum shares dropped 0.6 percent on Tuesday, while the Dow Jones Industrial Average  gained 0.3 percent.

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