Yum! Brands

Yum! seeks bigger mainland market in Little Sheep deal

PUBLISHED : Saturday, 14 May, 2011, 12:00am
UPDATED : Saturday, 14 May, 2011, 12:00am


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Yum! Brands, the operator of KFC, Pizza Hut and Taco Bell restaurants, has stepped up efforts to reach a wider mainland audience by buying hotpot chain Little Sheep Group.

The United States fast-food company plans to spend HK$4.4 billion to increase its holding in Little Sheep to 93.2 per cent from 27.2 per cent and take the Hong Kong-listed company private. It is offering HK$6.50 per share in a deal that values the hotpot chain at HK$6.7 billion.

'Yum! will help Little Sheep explore the untapped breakfast and lunch markets,' said Nicolas Wang, an analyst with Daiwa Capital Markets. 'Hotpot food, unlike traditional Chinese food, doesn't involve complicated cuisine. It is easy for Yum! to understand and manage Little Sheep.'

The buyout will need the approval of shareholders and the mainland government.

Little Sheep shares closed at HK$5 on April 21, the last trading day before Yum!'s takeover bid was officially unveiled yesterday. The stock yesterday rose 24.5 per cent to HK$6.14.

Some analysts have raised concern about the buyout. 'An office table can be moved from the east to west, but a different management style won't be easily imported,' said Jing Linbo, a professor at the Chinese Academy of Social Sciences. 'But the two companies seem prepared for potential frictions since they have spent a long time on the deal.'

Zhang Gang, the chairman of Little Sheep, said the privatisation would fuel the firm's growth as it would bring in Yum!'s management skills and financial support in the cut-throat mainland catering sector.

'We are determined to make Little Sheep the mainland's most successful hotpot brand,' Zhang said in a conference call. 'Further co-operation will be carried out to make Little Sheep bigger and stronger.'

The company runs more than 450 restaurants, including those franchised, across the mainland. Its plan to open 40 new outlets this year remained unchanged, said Zhang, who, along with the top management, will stay on with the company after the buyout.

Yum!'s bid for Little Sheep adds to evidence that foreign food giants are salivating over the potential of the Chinese restaurant business.

Global rival McDonald's aims to increase the number of mainland outlets from 1,300 now to 2,000 by 2013.

Yum! runs 3,200 KFC and 520 Pizza Hut restaurants on the mainland. It plans to open 500 new outlets annually in the next three years.

'Yum! has confidence in China's market,' said Sam Su Jingshyn, the chief executive of Yum!'s China operations. 'We'll take a cautious stance in expanding the brand in the domestic market.'

Mainland restaurants reported sales of 1.76 trillion yuan (HK$2.1 trillion) last year, up 18 per cent from 2009, according to the National Bureau of Statistics.

The mainlanders' rising affluence has made the catering sector a bright spot for investors.

Yum!'s offer to acquire China's largest hot-pot food company followed a botched deal by Coca-Cola in 2009 when the US soft-drink giant's bid for China Huiyuan Juice Group was rejected by Beijing amid monopoly concerns.

'It doesn't look like there will be a monopoly concern in this deal,' said Yang Chen, a lawyer with the law firm Jincheng & Tongda.

'China's catering sector is mammoth and any single player such as Yum! will still have a small market share overall.'

In the first quarter, the mainland contributed 54 per cent of Yum!'s total profit of US$264 million. Sales on the mainland rose 18 per cent to 32.5 billion yuan last year.