Details of the agreement
On September 2, 2016, ahead of the spin-off of its China operations, Yum! Brands (YUM) announced that it has entered into an agreement with Primavera Capital Group and Ant Financial Services Group to sell its stake in Yum! China for $460 million.
Primavera Capital Group, which is headed by Fred Hu, former chair of Goldman Sachs China, will be investing $410 million. Ant Financial, an affiliate of Alibaba Group, will be investing $50 million. The companies will receive shares at an 8% discount on the average share price of Yum! China traded between the 31st and 60th day after the spin-off. The spin-off is scheduled for October 31, 2016. Analysts are expecting the two companies together to receive shares between 4% and 6%, respectively, of Yum! China.
Investors will also receive warrants in which both companies together can buy 2% of the equity ownership in Yum! China twice with the strike price for an equity value of $12 billion and $15 billion. The warrants have to be exercised within five years of issuance.
What led Yum! Brands to spin off its China operations?
In 2012, Yum! Brands was struck by reports that its suppliers were utilizing improper food handling practices. Then, in July 2014, the company was struck by another food safety issue in which one of its suppliers was accused of supplying outdated meat. These food safety issues and loss of market share to local competitors prompted investors such as Keith Meister of Corvex Management to push for a spin-off of the China operations. Yum! Brands management had announced in October 2015 that the spin-off would be completed by the end of 2016.
Next, we’ll see how food safety issues have affected YUM’s revenues in the last five years. We’ll also see what analysts are forecasting for fiscal 2016 and fiscal 2017.