Yum Brands Spin Off Chinese Business (NYSE: YUM)

Yum Brands has announced its intentions to spin off its operations in China into a separate company. The new Chinese company will be based in Shanghai and will be known as Yum China. Chief executive of KFC Micky Pant will head the spun-off company. The separation was expected to be completed by the end of 2016.

About 6,900 KFC and Pizza Hut restaurants will be operated by the new company. Those restaurants had a combined revenue of $6.9 billion last year. That is more than the $6.3 billion in revenue generated by the rest of Yum Brands’ operations last year. The restaurant company owns KFC, Pizza Hut and Taco Bell.

Yum Brands has been struggling with weakness in its China business for years. The company was one of the first American fast-food operators to enter the Chinese market. Yum opened its first KFC store in 1987, roughly three years before the first McDonald’s location opened.

Over the last several years, Yum has had numerous problems in China, including several food-safety scandals. KFC stores in China have seen their average sales reduced from $1.7 million in 2012 to $1.2 million today. The longtime head of Chinese operations, Sam Sum was recently replaced.

The company is denying that spinning off its troubled Chinese business was its way of getting rid of a headache. A spokesman for Yum Brands said the company retained Goldman Sachs and Wachtell, Lipton, Rosen & Katz to offer advice on a business strategy about a year ago.

Some analysts believe that Yum is taking an important step to maximize long-term shareholder value with the spin off. Analysts and activist investors recently began calling for Yum to break up, either into three separate restaurant companies or by spinning off its operations in China.

Greg Creed became chief executive of Yum Brands at the beginning of this year. Mr. Creed has worked for the company for 20 years, spending most of that time at Taco Bell. Taco Bell has a small presence internationally and there are no Taco Bell stores in China. International sales account for less than 5 percent of the Taco Bell’s sales, according to Nomura Securities.

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