Is Yum! Brands Headed for a Spin-Off?

On October 15, Yum! Brands (YUM) announced the appointment of Keith A. Meister, founder of Corvex Management, to the company’s board of directors. This could partly explain why YUM shares rose. But it’s not uncommon for a company to have new board members, so what’s so special about this appointment?

Meister is an activist investor. At an investor conference held earlier in the year, Meister suggested that Yum! Brands should spin off its China business. This would leave YUM with KFC, Taco Bell, and Pizza Hut, which operate in the United States and the rest of the world except China. A spin-off would allow Yum! Brands to focus on these three divisions, which may have more growth potential.

An activist investor is an entity that accumulates shares of a company, usually 5% or more, with the intention to influence changes in the company. This may also allow the investor to gain a seat on the company’s board of directors. An activist investor usually believes the company is not performing to its fullest value and his or her participation can help a company unlock the upside for investors. Corvex holds about 5% of YUM shares and is one of the largest shareholders of the company.

Spin-offs are not uncommon. For example Darden Restaurants (DRI) spun off its Red Lobster brand in 2014. Since then, Darden has returned 31% to its shareholders, compared to Brinker International (EAT), DineEquity (DIN), and Bloomin Brands (BLMN) with returns of 2.5%, 10%, and  -9.5%, respectively, over the same period.

Currently, Darden  and Chipotle (CMG) each form about 1% of the First Trust Consumer Discretionary AlphaDEX ETF (FXD).

If a spin-off goes through, many analysts believe YUM shares could cross the $100 level. This would mean an upside of about 50% from its current price level of ~$67. This could explain why YUM shares spiked after this announcement.