Yum’s new China backers add spice at a price

September 2, 2016

The author is a Reuters Breakingviews. The opinions expressed are his own. 

Yum Brands has added some spice at a price. The KFC and Pizza Hut owner is selling a slug of its China business to Alibaba’s mobile-payments affiliate and a private-equity firm run by former Goldman Sachs China Chairman Fred Hu. They bring valuable tech nous and connections. It’s a better deal than usual for so-called cornerstone investors, but may pay off for Yum’s upcoming spinoff.

Hu’s Primavera Capital and Jack Ma’s Ant Financial, which operates Alipay, are investing $410 million and $50 million, respectively, in Yum China. In return, they’ll together receive between 4.3 percent and 5.9 percent of the company. That implies a wide valuation of between $8.5 billion and $11.6 billion for the enterprise. Their final stakes will depend on where Yum China’s shares trade when they are listed separately, a flotation planned for next month.

However things shake out, the new owners will buy in at an 8 percent discount to other shareholders. Standard anchor investors usually come in at a fixed value rather than a floating one linked to the market price. To secure brand names like Ma and Hu, after losing other potential backers, Yum was a little more flexible, throwing in warrants for more shares, too.

After a series of setbacks, including a 2014 food scare, influence and expertise will be important to the company’s future success. These new investors offer both. Hu, who will become Yum China’s non-executive chairman, may not have the same pull in Beijing as, say, China Investment Corp, the sovereign wealth fund that walked away from buying a stake in Yum in May. His contacts could be useful, though.

Ant’s e-commerce know-how could help Yum compete in a market where consumers increasingly transact using phones. The two companies already are talking about collaborating, with Ant touting its Big Data capabilities and ways to shorten queues at KFC.

Yum also secured other beneficial restrictions. For example, Primavera and Ant can’t own more than a fifth of Yum China. The new investors may have secured a tasty deal for themselves, but they also should give the upcoming sale a little extra flavor.

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