Investment in independent China unit beneficial for both Yum China, Alibaba

A Chinese couple walk past a KFC restaurant at a shopping mall in Beijing. Photo: AP

US fast food giant Yum Brands, the owner of KFC and Pizza Hut, has stolen a march on McDonald's to find strategic investors for its China unit, which is set to be separated from the parent company as an independent firm which will start trading on the New York Stock Exchange in November.

Recently, Yum Brands announced that it was selling a slice of Yum China for $460 million to Chinese private equity firm Primavera Capital and Ant Financial, a financial arm of e-commerce titan Alibaba Group, which were investing $410 million and $50 million respectively in Yum Brands' China business.

The strategic investment, which is scheduled to be completed on October 31 and will give the two investors 4 to 6 percent combined stake in Yum China, is widely seen as a revenge that Alibaba founder Jack Ma took against KFC, which once refused to offer a job to him in its early years of operation in China. The spin-off is also expected to take place on October 31.

Primavera Capital founder Fred Hu, the former Greater China chairman of Goldman Sachs Group, will become non-executive chairman of Yum China as part of the investment deal, which also allows Primavera Capital and Ant Financial to buy the shares of the new company at an 8 percent discount on the average price at which Yum China shares trade between 31 days and 60 days after they are distributed to Yum shareholders.

At a recent press conference, Shen Danyang, spokesman of China's Ministry of Commerce, said that the decision by Yum Brands last year to turn its China unit into an independently run and publicly held company showed its strong confidence in its growth potential in China, which already contributes half of the US fast food giant's global revenues.

In recent years, however, Yum Brands' sales in China has been badly hit by food safety scandals, intensified competition from domestic players and Chinese consumers' switch to healthier and Chinese-style dining options.

However, the introduction of capital from China-focused investors is expected to accelerate the process of localization in China, where Yum Brands operates more than 7,000 KFC outlets in at least 1,000 cities.

Previously, some activist investors urged Yum Brands to operate separately, with the aim of better serving local markets and increasing shareholder value.

"Yum China needs money after the spin-off and listing (in New York). The two Chinese enterprises that make the strategic investment are betting that Yum China's shares will continue to grow," said Zhu Danpeng, an associate with the China Branding Research Institute, predicting that the increase in Yum China's market capitalization caused by the listing will attract more investors.

There are signs that Yum Brands' sales in Asia are bouncing up, with the company's second-quarter profit beating estimates which was caused by the KFC restaurants' better-than-expected performance in China.

Hu, founder of Primavera Capital, said in a statement that China's renewed effort to invest in new transportation centers, shopping malls and other physical and electronic infrastructure will promote domestic consumption, which will in turn boost the robust expansion of retail and catering industries in the country.

In a separate statement, Micky Pant, CEO of Yum China, echoed Hu by saying that the rich experience in commerce and extensive connections of the two Chinese investors will be "extremely beneficial" for his company to further carve out territory in the strongly competitive Chinese market.

The strategic investment also makes the best of both worlds.

The deal with Yum Brands will allow Alipay, a widely used mobile payment service operated by Ant Financial, to be used at more KFC and Pizza Hut restaurants across China, which Eric Jing, president of Ant Financial, said will "help shorten queues at the cashier".

According to research firm iResearch, Alipay grasped 68 percent of China's third-party mobile payment market in 2015, with the number of its users soaring to 450 million. But facing the competition from other mobile payment services like Tencent's WeChat Payment, Alipay has lost about 10 percent of its market share from a year earlier. So, obtaining direct access to Yum's customer base could help Alipay maintain its market domination.

In fact, the cooperation between Ant Financial and Yum Brands dates back to July 2015, when KFC outlets in China began allowing customers to complete transactions via Alipay, whose users could also take part in the restaurants' promotion activities through their mobile phones.

In April, in partnership with its parent company Alibaba, Ant Financial made a $1.25 billion investment into, a Chinese food delivery app. The two companies also control online food service platform Koubei, which is similar to Meituan-Dianping, a hugely popular online restaurant booking and movie ticketing platform, and Baidu's Nuomi platform. It is predicted that more KFC and Pizza Hut locations will be incorporated into the and Koubei systems.

As Pant said, Ant Financial can further provide unique insights to help Yum China better connect with consumers through mobile technology.

In addition, industry analysts say that Ant Financial could develop potential customers for its small loan business by reaching out to suppliers of Yum China.

In recent years, foreign-based multinationals have been accustomed to turning their China units into independent entities, a common practice they use to raise more money locally and better navigate in China where local rivals are gaining ground and industry regulations are being tightened.

McDonald's is reportedly struggling to seek qualified investors for its outlets in China, where it is planning to sell its wholly owned restaurants to franchisees as part of its revitalization plan, which also includes adapting its menu to appeal to Chinese taste, after earlier food safety scandals have taken toll on its sales in the country.

The Oak Brook, Illinois-based company said that franchising will be an easy way to unlock its growth potential, considering the business model could help free up capital and generate stable returns.

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