Yum! Brands

Little Sheep shares fly on buyout news

PUBLISHED : Wednesday, 09 November, 2011, 12:00am
UPDATED : Wednesday, 09 November, 2011, 12:00am


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Hotpot chain Little Sheep jumped more than 15 per cent to an all-time high yesterday after the Chinese government gave the green light to a buyout bid by Yum! Brands.

'The government approval came much earlier than the market had expected, sharply pushing up the share price,' said Olive Xia, food and beverage analyst of Core Pacific-Yamaichi Securities.

Hong Kong-listed Little Sheep rose to a record HK$6.40 just hours after it said early yesterday that the buyout proposal had been cleared by the Ministry of Commerce. The stock ended the day 15.2 per cent higher, at HK$6.37, yesterday.

The company's shares plunged 12 per cent on October 26, the most in three years, when Chinese regulators said they would extend the review period of the bid.

Yum! Brands, US owner of the KFC and Pizza Hut fast-food chains, plans to spend HK$4.4 billion on increasing its holding in Little Sheep to 93.2 per cent, from 27.2 per cent, and intends to take the company private.

It is offering HK$6.50 per share in a deal that values the Inner Mongolia-based hotpot chain at HK$6.7billion.

The deal will be subject to various conditions including approval by Little Sheep shareholders.

'This is another important step in executing our strategy of being rooted in China, part of China,' said Sam Su, chief executive of Yum! Brands' mainland division.

Little Sheep now runs more than 450 restaurants, including franchised outlets, across the mainland. It plans to open 40 new outlets this year, said chairman Zhang Gang, who, along with the top management, will stay on after the buyout.

Competition in the mainland's highly fragmented restaurant industry has intensified in recent years. According to the China Chain Store and Franchise Association, a dozen large-scale hotpot chains operate more than 100 outlets each.

After acquiring Little Sheep, Yum! Brands would hold about 2 per cent of the total market share in the industry, the association said.

Shi Jun, a senior consultant with Beijing-based Alliance PKU Management Consultants, said the deal would help the US fast-food giant enhance its leading position on the mainland, where it generates more sales than in the US, and would help improve Little Sheep's management.

'There's still a huge gap between domestic and international restaurant operators. Some domestic players have tried to copy foreign companies' operating model, but so far, none of them have become as successful as McDonald's or KFC,' said Shi.

Yum! Brands said this year that it planned to open 500 outlets annually in the next three years, on top of the 3,200 KFC and 520 Pizza Hut outlets on the mainland. Its rival McDonald's also aims to expand from 1,300 outlets now to 2,000 by 2013.