Yum Brands to spin off China business

Global fast food giant Yum Brands Inc plans to separate its China business into an independent company after nearly three decades of operation in the country.

The move comes in response to investor pressure on the back of slower-than-expected growth in the world's second-largest economy.

Yum China will become a franchisee of Yum Brands and will have exclusive rights for three popular brands - KFC, Pizza Hut and Taco Bell, while Yum Brands, will focus on expanding the presence and performance of its three iconic brands around the world, the US company said in a statement yesterday.

So far, Yum Brands, the first foreign fast food chain to enter China, has been operating and building restaurants directly in the country, while elsewhere in the world it runs most of its business through franchisees.

The Louisville, Kentucky-based company has been deriving more than half of its sales and profit over the years from China, one of its fastest growing markets. Last year, Yum Brands reported $13.3 billion in revenue, of which $6.9 billion was from China.

The transformation is expected to be completed by the end of next year.

Greg Creed, CEO of Yum Brands Inc will continue to lead the global business after separation, while Yum China will be led by Micky Pant, who took the reins of the Chinese operations in August.

It is believed that the company's newly appointed board member and activist investor Keith Meister, whose Corvex Management owns a 5-per cent stake in the fast food chain, has pushed for the new changes including separation.

Currently, Yum Brands operates 41,000 outlets in 125 countries with about 6,900 of them in China. KFC is the market leader in the country with 4,900 restaurants across 1,000 cities.

The company expects that there is potential to nearly triple the number of restaurants in China to over 20,000 and also has significant growth potential in existing restaurants.

Yum Brands will become more of a ''pure play'' franchisor over time, and is targeting having at least 95 per cent of the business operated by franchisees by the end of 2017. It plans to add approximately 2,000 new units every year.

''Following the separation, each standalone company will be able to intensify focus on its distinct commercial priorities, allocate its own resources to meet the needs of its business, and pursue distinct capital structures and capital allocation strategies,'' Creed said.

''This will provide a clear investment thesis and visibility to attract long-term investor base suited to each business,'' he further added.

Earlier this month, the company reported slower-than-expected sales growth in China for the third quarter.

Revenue for the three quarters fell 1 per cent, while operating profit dropped 3 per cent.

Anticipating a more challenging second-half year, Greg had said,  ''Given our lower full-year expectations in China, combined with additional foreign exchange impact, we now expect 2015 EPS growth to be well below our target of at least 10 per cent.''

Yum Brands' chairman David Novak said, ''Over the years, we built our company's global structure outside of China based on a franchise model that generates stable earnings, high profit margins, low capital investment and strong cash flow conversion.''

He said the deal ''will create two best-in-class independent companies'' with a capital structure ''that provides strong financial support for our business strategies and meaningful cash returns to shareholders.''

The move was welcomed by the market. Shares in Yum Brands went up more than 4 per cent in yesterday's trading in New York, before ending 2 per cent high at $73.05.

The company also said that effective January 2016 its India business will integrate its three major restaurant brands into the global KFC, Pizza Hut and Taco Bell divisions of Yum Brands, as the company moves to organizational alignment by brand, rather than by geographic location.