Chinese sovereign fund consortium eyeing Pizza Hut and KFC restaurants in China

Employees working at a KFC store in Shanghai in this July 29, 2014, file photo.
Employees working at a KFC store in Shanghai in this July 29, 2014, file photo.PHOTO: REUTERS

HONG KONG/SINGAPORE (REUTERS) - A group of investors comprising sovereign wealth fund China Investment Corp (CIC), KKR & Co and Baring Private Equity Asia is in talks to buy controlling stake in Yum Brands Inc's China unit, people familiar with the matter said.

Yum Brands, owner of the Pizza Hut and KFC fast food chains, plans to spin off its 6,900 China restaurants by the end of 2016. The China unit accounts for about half of its parent's total sales and is valued at about US$10 billion, based on its core earnings, bankers and analysts estimate.

The US-based company had initially planned to sell a stake of about 20 per cent in the China operation to anchor investors ahead of a planned listing of the business in New York Exchange and possibly in Hong Kong.

But the deal structure is being reworked as acquiring a minority stake is less appealing for buyout firms, making it difficult for them to secure debt funding to finance the deal. It wasn't immediately clear how much the investor group plans to pay for Yum's China business.

Bloomberg first reported the news and said the deal could vale Yum China at between US$7 billion-US$8 billion..

According to people familiar with the transactions, it was unclear whether Yum would agree to sell a majority stake, as disposing of more than 20 per cent of the China business would attract a higher tax bill.

Yum, still the largest fast food chain in China, has been losing ground to McDonald's as both strive to revive flagging sales in the teeth of growing competition from local rivals and a slowing economy.

McDonald's itself is changing its business model in Asia by planning to bring in partners to own a majority of its restaurants within a franchise operation.

Chinese diners once flocked to Yum outlets - and to McDonald's - helping drive revenue growth of nearly 30 per cent a year between 2006 and 2012. But Yum's China sales dipped 0.4 per cent in 2015, after two flat years, underlining how managers have struggled to repair its reputation since the food safety scares.

In 2014, Yum was found to be selling tainted meat at KFC locations. The company immediately cut ties with its supplier, Shanghai Husi, and launched a frantic marketing campaign to convince the public that its food was safe.