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Yum China seals sale deal - with wrong buyer

THE party at China's oldest Western food chain is missing a key guest.

China Investment Corp (CIC) is joining a consortium including Hillhouse Capital and former KKR & Co senior executives, to plan a US$14 billion-plus acquisition of Yum China Holdings Inc, Vinicy Chan, Cathy Chan, Carol Zhong and Manuel Baigorri wrote on Wednesday.

The purchase of the KFC and Pizza Hut operations, spun off just a couple of years ago from Yum! Brands, would be the biggest consumer-brand deal the country has seen.

Yum China's almost 8,200 stores across the nation are struggling with rising competition and flagging sales, and the transaction gives the company a couple of useful things.

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With CIC, the sovereign-wealth fund, the iconic American brands get a perceived seal of government approval after they had lost favour among trendy diners in China's biggest cities.

Meanwhile, the involvement of tech-savvy and cost-conscious private-equity buyers like KKR and Hillhouse could promote the chains in a world where the smartphone is the centre of food ordering.

There is another bonus: CIC is about as local as an owner can get, at a time when localisation is becoming more important to China's retail scene than chasing premium brands.

Even Starbucks is starting to feel the heat from homegrown Luckin Coffee stores.

What the biggest American dining chain in China really needs, however, is an owner that can cut costs efficiently, and even more important, expand in lower-tier cities, where its fried chicken and pizzas still have some allure. Yum China has begun that process, but it needs a hand.

McDonald's Corp's China strategy might have been a better model. The burger giant last year sold 80 per cent of its Hong Kong and Chinese business to Citic Group Corp and Carlyle Group. What it got from Citic, a state-owned behemoth with real estate holdings, was access to cheaper properties and an owner whose core competence is running businesses efficiently.

There is probably a limit to how much money Yum China's private-equity backers can throw into the franchise - or cut costs, or for that matter, localise. It already offers congee in KFC outlets and durian and Peking duck pizza in Pizza Hut, for instance.

Pizza Hut may be the biggest challenge - Britain's PizzaExpress is now in Chinese hands and success continues to elude that chain - but KFC has prospects.

So what is really needed is a strategic investor - a heavyweight Chinese restaurant or property backer who can get the sales strategy right in second- and-third-tier cities. While that is lacking, the whole banquet looks a lot less appealing. BLOOMBERG

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