Chinese Firms Find Yum Brands' Investment Appetizing

Baird views the recent Chinese investments in Yum! Brands, Inc. YUM as positive and maintains its Neutral rating with $92 price target.

Yum China Investment

Yum Brands announced agreements with Primavera Capital Group (a China-based private equity firm) and Ant Financial Services Group (an online/mobile financial services company) to invest $460 million in Yum China.

"Although the transaction appears dilutive to prospective Yum China shareholders on the surface, the presence of credible anchor investors who can bring strategic value to the business may help to support the valuation that investors are willing to apply to Yum China after the spinoff," analyst David Tarantino wrote in a note.

Tarantino's comments has a point as Primavera (led by prominent Chinese businessman Fred Hu) was pre-IPO investor in Alibaba Group Holding Ltd BABA and has experience in scaling large businesses within China. On the other hand, Ant Financial operates Alipay, China's largest online payment service, and has investments in other online/delivery businesses in the restaurants industry.

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In the last few years, Yum Brands suffered a drop in sales in China as food safety issues in 2012 and July 2014 have tarnished its image in the world's second largest economy. Following that incident, it has not been the same for Yum Brands in China.

The consumer concerns about successive supply chain incidents pressured China division results in 2013 (comps -13 percent, profit -23 percent), 2014 (comps -5 percent, profit -8 percent) and 2015 (comps -4 percent, profit +6 percent).

The dwindling results led to investor pressure mainly from Corvex Management, the activist hedge fund run by Keith Meister, to separate the Chinese business.

Yum Brands Vs. Yum China

Yum Brands is planning to separate Yum China, and the remaining business into two publicly traded companies on October 31, 2016. Primavera's founder Fred Hu would become chairman of Yum China following the spinoff.

"Hu appears to be an excellent choice for the Chairman role, as his involvement should bring credibility to Yum China in the eyes of many constituents (including the government)," Tarantino added.

The Louisville, Kentucky-based Yum Brands believes the spinoff should help both companies meet the needs of their customers better.

At time of writing, shares of Yum Brands were up 0.11 percent to $91.36.

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