Colonel Sanders

KFC owner Yum Brands Inc (YUM.N) 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 protege 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.

CHINA WOES

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 was hit by a scandal over expired meat from a supplier.  The Pizza Hut brand has been hit particularly hard due to missteps such as promoting a premium-priced steak dish as the China economy softened and due to local businesses cutting back on parties and events. Yum is also struggling to gain ground from a growing number of food delivery apps from Chinese internet firms such as Baidu Inc's (BIDU.O) Waimai and Alibaba-linked (BABA.N) Meituan that offer cheaper meal delivery deals.

 

 

China = growth/scandal trap
China is just not worth the trouble for many companies.