May 19, 2016 / 7:57 AM / in 2 years

Temasek, CIC-KKR advance to second round of Yum China stake sale: sources

NEW YORK/SINGAPORE (Reuters) - Singapore state investor Temasek Holdings and a consortium that includes China Investment Corp (CIC) and KKR & Co (KKR.N) have advanced to a second round of bidding for a minority stake in Yum Brands Inc’s (YUM.N) China unit, people familiar with the matter told Reuters.

A customer walks out of a KFC restaurant in Shanghai, China, October 9, 2015. Yum Brands Inc, the owner of KFC and Pizza Hut, releases its first-quarter earnings results after the bell. REUTERS Aly Song/File Photo

Another private equity-backed consortium has also moved to the second round, the people said, although its identity could not be immediately confirmed. Louisville, Kentucky-based Yum Brands, owner of the Pizza Hut and KFC fast food chains, aims to spin off its 7,205 China restaurants by the end of 2016, amid pressure from activist investor Corvex Management, whose founder, Keith Meister, is on Yum’s board.

The second round of bids for the stake up for sale - around 20 percent of the business - are due by the end of this month, the people said, declining to be identified because the information was confidential.

Yum’s entire China unit is valued between $8 billion and $11 billion, based on its core earnings of about $1 billion, the people said.

“I will tell you as a large shareholder, the Yum board selling this business for $7 or $8 billion is not the right thing, and I don’t think anyone would disagree about that,” Corvex’s Meister told CNBC in a recent interview. Corvex owns 5.2 percent of Yum, according to Thomson Reuters data.

Yum, still the largest fast food chain in China, has been losing ground to McDonald’s Corp (MCD.N) as they both strive to revive flagging sales in the teeth of growing competition from local rivals and a slowing economy.

In the latest quarter, Yum’s China sales grew faster than Wall Street estimates, raising expectations that a key profit driver for Yum is showing signs of stability after battling many quarters of disappointing sales.

Yum shares haven risen 9.7 percent in New York so far this year, while the S&P 500 Index .SPX has been flat in the same period.

Some bidders would be keen to buy control of the China business, the people said, but they noted that Yum is sticking to the minority stake sale plan because it is more tax-efficient.

It was not clear if these bidders would pursue a transaction if Yum does not adjust plans and offer a controlling stake for sale, the people said.

A Yum spokeswoman declined to comment on prospective bidders. She said, “We continue to make good progress since we announced the transaction separating Yum and Yum China into powerful, independent, focused companies by the end of 2016.”

KKR and Temasek declined to comment. China sovereign wealth fund CIC did not immediately respond to a request for comment.

While Temasek, which manages about $190 billion in assets, has about 28 percent of its portfolio in the financial sector, it has been placing more bets in consumer companies of late.

In 2014, it bought almost a quarter of health and beauty retailer A.S. Watson, backed by Hong Kong tycoon Li Ka-shing, for about $5.7 billion in its single biggest investment.

Last year it was also part of a private equity consortium led by MBK Partners that bought British supermarket retailer Tesco PLC’s (TSCO.L) South Korea business.

Reporting by Lauren Hirsch in NEW YORK and Saeed Azhar in SINGAPORE; Additional reporting by Matthew Miller in BEIJING and Michael Flaherty in NEW YORK; Editing by Denny Thomas and Edwina Gibbs

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