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China sovereign fund said to seek control of US$8b Yum unit

Tuesday, April 19, 2016 - 10:34

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A consortium backed by sovereign fund China Investment Corp has expressed interest in buying a majority stake in Yum! Brands Inc's China business, which runs more than 7,100 KFC and Pizza Hut eateries across the nation, people with knowledge of the matter said.

[BEIJING] China wants to get control of the most popular fast-food chain in the country.

A consortium backed by sovereign fund China Investment Corp has expressed interest in buying a majority stake in Yum! Brands Inc's China business, which runs more than 7,100 KFC and Pizza Hut eateries across the nation, people with knowledge of the matter said.

The investor group, which also includes KKR & Co and Baring Private Equity Asia, is conducting due diligence on the unit, according to the people, who asked not to be identified as the information is private. A deal could value Yum! China at US$7 billion to US$8 billion, the people said.

A majority purchase by the CIC consortium would give a domestic entity control of a leading fast-food chain in the Chinese market for the first time. Such a deal would also provide Louisville, Kentucky-based Yum with cash that could be used to fund a dividend and its planned share buyback, as well as help reduce exposure to a business with shrinking market share, one of the people said.

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The China-backed investor group is interested in buying as much as 100 per cent of Yum China, two of the people said. Yum is considering all options, though it may still decide to pursue the sale of a minority stake or proceed with a previously announced tax-free spinoff of the business, according to the people.

The company isn't currently running a formal sale process, one of the people said. 

Singapore state investment fund Temasek Holdings Pte Ltd and Chinese private equity firm Primavera Capital Ltd are separately vying for stakes in Yum China, the people said.

Chinese private-equity firm Hopu Investment Management Co, led by dealmaker Fang Fenglei, was also considering a potential investment in Yum China, though deliberations are at an early stage, a person with knowledge of the matter said last month.

A representative for Yum said in an e-mailed statement the company continues to make "good progress" since it announced the separation of its China business, declining to comment further.

CIC's Beijing-based press office didn't immediately reply to an e-mail seeking comment, while representatives for Baring and KKR declined to comment.

"We decline to comment on market speculation," Temasek said in an e-mailed statement. Fred Hu, the founder of Primavera, didn't answer several calls to his mobile phone seeking comment.

The performance of locally owned chains continues to trail foreign peers like KFC, which opened its first Chinese outlet in Beijing in 1987.

The biggest home-grown operator, Hua Lai Shi Catering Management & Service Co, had a three per cent market share last year compared to Yum's 24 per cent, according to Euromonitor International.

Yum has lately seen its dominance in the world's second-largest economy wane, as its market share in the country has fallen from 39 per cent in 2010, Euromonitor data show. The company plans to add 600 outlets this year to its more than 7,100 restaurants across China, according to its website.

Yum bowed to activist-investor pressure in October and agreed to separate its China business from its US operations. Hedge fund manager Keith Meister, a protege of billionaire Carl Icahn, said Yum's Asian market could be better served with a more focused business.

China accounted for about 53 per cent of Yum's revenue last year, data compiled by Bloomberg show.

Temasek has pursued consumer and retail deals across Asia, joining a consortium to acquire Tesco Plc's Homeplus supermarket chain last year and buying a minority stake in Hong Kong retailer AS Watson & Co for US$5.7 billion in 2014.

Investments in China made up 27 per cent of its portfolio as of March 2015, the second-biggest country position after Singapore, according to its latest annual report.

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