Yum Will Sell Stake In China -- WSJ
September 03 2016 - 3:03AM
Dow Jones News
By David Benoit, Kane Wu and Rick Carew
Yum Brands Inc., the owner of KFC and Pizza Hut, has struck a
deal to sell a slice of its China operations to a prominent Chinese
deal maker and the financial affiliate of Chinese internet giant
Alibaba Group Holding Ltd., as it prepares for a spinoff of the
China unit.
Primavera Capital, run by former Goldman Sachs Group Inc.
Greater China Chairman Fred Hu, and Ant Financial Services Group
will buy a combined $460 million stake in the Yum China Holdings
Inc. spinoff.
The Chinese backing could spark interest in the spun-off company
among other investors after it separates from Yum Brands and begins
trading separately on the New York Stock Exchange in November. Ant
Financial runs Alipay, China's largest online payments service, and
has investments in the online food-delivery business. Mr. Hu, a
well-respected economist and deal maker, will become Yum China's
chairman.
They will buy the shares at an 8% discount to the average price
at which Yum China's shares trade between 31 days and 60 days after
they are distributed to Yum shareholders. The two investors could
own between 4% and 6% combined of Yum China, depending on how the
shares trade.
The deal was first reported Friday by The Wall Street
Journal.
Louisville, Ky.-based Yum has had huge success in building KFC
into China's most popular fast-food chain since it entered the
country in 1987. In recent years, the fried-chicken franchise
stumbled as growing competition and food-safety concerns hit sales.
The KFC brand in China has returned to positive sales growth over
the past year, and Yum China overall generates over a billion
dollars of cash flow annually.
The new investors are betting that Yum China's value will
continue to grow. As part of the agreement, Primavera and Ant
Financial will receive warrants to buy 2% chunks of Yum China
shares twice at valuation thresholds of $12 billion and $15
billion. Those warrants will have a five-year term and could
increase the two investors' ownership to nearly 10% if
exercised.
While Yum Brands won't own shares in Yum China after the
spinoff, the Chinese operation will continue to pay a 3% royalty
rate to Yum Brands. The Yum China business will be debt-free after
the spinoff and will have the fresh cash from Primavera and Ant
Financial to fund growth plans.
The decision to separate the operations came after Yum Brands
fell under pressure from activist investors, including Corvex
Management LP and Dan Loeb's Third Point LLC, recommending
overhauls. Corvex's Keith Meister, who has pushed hard for the
China spinoff, received a seat on Yum's board in October and has
been instrumental in negotiations, according to people familiar
with the matter. Corvex is among Yum Brands' top holders with a
5.4% stake.
Yum's partnership with Ant Financial, China's most valuable
internet finance company at $60 billion, could help the fast-food
chain navigate China's rapidly changing and highly competitive
food-delivery business. More transactions take place over Alipay at
Yum China's KFC and Pizza Hut chains than at any other fast-food
chain in China.
Chinese e-commerce giant Alibaba, together with its financial
affiliate, has carved out territory in China's competitive online
food-delivery and booking-services market. Alibaba and Ant
Financial together made a $1.25 billion bet on food-delivery app
Ele.me in April. The two also control online food-services platform
Koubei; the business, whose Chinese name translates as
"word-of-mouth reputation," has been growing quickly in recent
months. Those Alibaba-backed platforms compete with
Meituan-Dianping, China's largest online provider of
movie-ticketing and restaurant bookings, as well as Chinese search
company Baidu Inc.'s Nuomi platform.
Primavera Capital is a China-based private-equity firm founded
by Mr. Hu, who led Goldman's $2.9 billion deal to take a 5% stake
in Industrial & Commercial Bank of China Ltd. ahead of its huge
initial public offering. Mr. Hu has built ties with a range of
China's most important financial figures and earned a Ph.D in
economics from Harvard University.
Primavera was also an investor in Alibaba before its initial
public offering as part of a financing package raised to repurchase
half of Yahoo Inc.'s stake in Alibaba. Mr. Hu's role in that deal
and close relationship with Alibaba Executive Chairman Jack Ma won
Primavera a coveted early investment in Ant Financial last year at
a valuation below its latest $60 billion price tag.
Write to David Benoit at david.benoit@wsj.com, Kane Wu at
Kane.Wu@wsj.com and Rick Carew at rick.carew@wsj.com
(END) Dow Jones Newswires
September 03, 2016 02:48 ET (06:48 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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