December 10, 2015 / 3:07 PM / in 2 years

Yum to return $6.2 billion to shareholders before China separation

(Reuters) - Yum Brands Inc (YUM.N) said it would return up to $6.2 billion to shareholders before separating its China business and listing it on the New York Stock Exchange, and possibly in Hong Kong.

A man walks past a logo of KFC, outside a restaurant in Shanghai, China, July 30, 2015. REUTERS/Aly Song

The KFC and Pizza Hut owner, which expects to spin off Yum China by the end of 2016, said the capital return could take various forms, including a share repurchase, tender offer or special dividend.

Yum, which has been hit by food scandals and marketing missteps in China, also said same-restaurant sales in the country fell about 3 percent in November.

The 6,900-restaurant China division accounted for 54 percent of Yum’s overall operating profit in the third quarter, but sales at established restaurants in the country have fallen in four of the last five quarters.

Still, the company said it was targeting earnings per share growth of about 15 percent annually for Yum China from 2017.

Yum China will be domiciled in the United States, Yum Brands Chief Financial Officer Pat Grismer said at an investor conference in Plano, Texas on Thursday.

Yum Brands shares were down 3 percent at $71.69 in late morning trading on Thursday.

Yum China had $1 billion in earnings before interest, taxes, depreciation and amortization (EBITDA) this year, and the “New Yum,” excluding China, had almost $2 billion in EBITDA this year, Grismer said.

The Yum business, excluding China, will have a sustained leverage ratio of about 5 times EBITDA, the company said, citing the capital return plan. At present, the company’s debt is on par with EBITDA.

Yum Brands said it would receive a license fee of 3 percent of system sales in China, at the lower end of the 3-3.5 percent range analysts had expected.

The lower China royalty - compared with the global royalty rate of 4-6 percent - gives operators in the country some breathing room, analysts said.

The company said it expects 96 percent of its restaurants to be franchised by the end of 2017, up from 79 percent at the end of 2014.

“This implied rate of 4 percent company-owned stores should put the company more in line with some of the approaches we have seen taken by some other publicly traded companies that we find favorable,” Nomura Securities analyst Mark Kalinowski wrote in a note.

Most U.S.-based fast food chains, including McDonald’s Corp (MCD.N) and Wendy’s Co (WEN.O), are franchising out more restaurants to cut costs.

Yum also said it would start testing out Taco Bell in China soon.

Reporting by Lisa Baertlein in Los Angeles and Sruthi Ramakrishnan in Bengaluru; Editing by Saumyadeb Chakrabarty

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