Yum! Brands, Inc. (NYSE:YUM) made headlines last October when it announced it was planning to spin out its China operations into a separate, publicly traded franchisee. As the spinoff day is quickly approaching, many are wondering whether YUM stock looks better or worse without its Chinese counterpart. Before I share my thoughts, let’s take a closer look at the move.
Based in Louisville, Kentucky, YUM is an owner and operator of fast-food restaurant brands KFC, Pizza Hut and Taco Bell, with more than 43,000 restaurants in roughly 140 countries and territories.
The company was spun out of PepsiCo, Inc. (NYSE:PEP) in 1997, and since then has become a leader in the global retail development space opening an average of six new restaurants around the world each day.
Following pressure from its largest investors, activist hedge fund Corvex Management, YUM announced that it would spin Yum China out of its current operations.
Despite being the largest fast-food chain in China, the business had been facing issues in recent years including increased competition — specifically from McDonald’s Corporation (NYSE:MCD) — and food safety scares.
The spinoff will take place on Oct. 31, with Yum China trading on the New York Stock Exchange Nov. 1 under the ticker symbol “YUMC.” From then on, Yum China will pay its former parent a percentage of its sales for the exclusive brand rights to KFC, Pizza Hut and Taco Bell.
What the Yum China Spinoff Means for YUM Stock
According to Yum CEO Greg Creed, “Yum will still have meaningful exposure to China through the royalty.” In fact, Yum China CEO Micky Pant is planning to open 500 new stores each year — Taco Bell has yet to make its debut in China, although restaurants are expected to open either at the end of the this year or the beginning of next — with the total goal being 7,500 by the end of 2016. That’s three times more than the next competitor.
Then just last month, YUM stock made the headlines again when it announced that it would sell a stake of the China business ahead of the spinoff to Chinese investment firm Primavera Capital, an affiliate of Alibaba Holding Group Ltd (NYSE:BABA), and Ant Financial, which runs BABA’s Alipay mobile payments platform.
Primavera will pay $410 million while Ant Financial will fork up $50 million, and the investors will receive warrants to buy an additional stake down the road. The proceeds of the sale will be determined in the future by the Yum China board of directors, although the company has hinted that part of the money could go toward expanding business across the country.
YUM stock is up 25% in the year since the initial spinoff announcement, so it’s clear investors like the idea. Obviously there is upside growth potential for the China story that could increase locations by 200% without hurting YUM’s own traffic or margins — management said last October they were looking to triple the number of restaurants in China to 20,000. And the public relations aspect of things would also benefit top-line comparable store growth.
However, it’s too early for me to have much conviction yet. In the end, I’m sitting back and watching before making any investing decisions.
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