China sovereign fund backs deal for US$13b Yum China

[SHANGHAI] China Investment Corporation is backing a potential takeover of Yum China Holdings, which runs KFC and Pizza Hut outlets in the world's most populous nation, people with knowledge of the matter said.

The sovereign fund and DCP Capital, the investment firm run by former KKR & Co senior executives, are part of a consortium with Hillhouse Capital that's considering a buyout of Yum China, according to the people. Baring Private Equity Asia is also joining the investor group, which already includes KKR, the people said, asking not to be identified because the information is private.

Yum China shares have fallen 14.5 per cent this year, giving it a market value of US$13.1 billion in New York. The consortium is considering taking Yum China private with an eye to potentially relisting the business in Hong Kong at a later date, one of the people said.

A takeover of the company, which was spun off from Yum! Brands in 2016, would be the biggest-ever Chinese takeover of a consumer firm, data compiled by Bloomberg show. Private equity firm Primavera Capital, which owned 4.3 per cent of Yum China as of June, has been weighing options for its stake in the company and could consider joining a bidding group, according to the people.

KKR Veteran

No final decisions have been made, and the makeup of the bidding group could still change, the people said. There's no certainty the deliberations will lead to a transaction, they said.

CIC's press office didn't immediately reply to an email seeking comment, and an official at Primavera didn't immediately respond to requests for comment. A representative for Hillhouse said she couldn't immediately comment. Representatives for Baring, DCP Capital, KKR and Yum China declined to comment.

DCP Capital was started last year by buyout veterans including David Liu, the former China head and co-head of Asia private equity at KKR. In May, it agreed to invest in Venus Medtech, a Hangzhou-based developer of heart valve replacements that's backed by Goldman Sachs Group.

Biggest Footprint

Yum China operates the country's biggest network of fast-food restaurants, with about 8,200 outlets spread across more than 1,200 cities at the end of June, according to its latest results. The company is struggling to attract younger Chinese diners to its Pizza Hut restaurants in the face of increasing local competition and changing eating habits that favor healthier fare.

A potential takeover comes as the escalating trade war fuels speculation China could turn to consumer boycotts as part of its pushback against US President Donald Trump's tariffs.

Yum China's same-store sales fell one per cent in the most recent quarter, and the company said its large scale is a factor holding back growth. Still, Yum China has said it's not backing off its expansion plan and is targeting 20,000 stores long-term.

"It's the right thing to do, given our leadership in the market, and our ambition to maintain the leadership and market share in the long run," chief executive officer Joey Wat said on a call with analysts earlier this month. "The China market is still a growing market. It still has a lot of opportunities."

BLOOMBERG