Louisville, Kentucky-based Yum! Brands, Inc’s (YUM) overseas expansions, particularly in China, remains a key growth driver and to further boost its market share in China, the company offered a bid to buy the Chinese chain of hot pot restaurants, Little Sheep Group Limited.
Yum, which owns KFC, Pizza Hut and Taco Bell, offered to purchase all the outstanding shares of Little Sheep last month. Little Sheep shares are listed on the Hong Kong Stock Exchange.
Yum currently owns a 27.2% stake in Little Sheep and intends to buy the remaining shares for HK$6.50 (83 cents) per share in cash, representing a 30% premium to the closing price on May 12. The total offer value for Little Sheep stood at about HK$6.7 billion or approximately $860.0 million.
The deal will raise the stake of Yum to 93.2%, while the remaining 6.8% will be owned by the company’s founders. Yum purchased its current stake in Little Sheep in 2009 via the acquisition of a UK-based private equity firm, 3i that developed the Chinese chain’s franchise model and re-branded the restaurants.
The transaction is expected to be lucrative for both the companies as the privatization of Little Sheep will reduce its exposure to market volatility and give it quicker access to growing opportunities. On the flipside, the deal will strengthen Yum’s presence in the rapidly growing Chinese market. Moreover, both the companies will be able to save on costs.
Yum! Brand’s China Division offers immense growth potential with its two leading brands KFC and Pizza Hut and with the recent deal, the company will be able to cater to a wide range of customers beyond pizza and chicken.
Little Sheep’s hot pot concept also has a demand in other overseas market and in the long term Yum! will make efforts to expand the concept and the brand internationally.
Management’s earnings growth model includes annual operating profit growth of at least 15% in the China Division and we believe the targets will be easily achieved after the deal.
During the first quarter of 2011, comparable restaurant sales improved 13% year over year in China and sales growth was also fueled by a 28% increase in the China division, offsetting the decline of 9% and 5% in the U.S and Yum! Restaurants International division, respectively.
More than 40% of company-owned units of Yum are located in China and the China division of Yum Brands opened more than 500 new restaurants in 2010. Yum! is thus intensifying its growth in the Chinese market through rapid unit expansion and also boasts a competitive edge over its strongest peer McDonald’s Corp. (MCD) in China.
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