March 25 (Bloomberg) -- Yum! Brands Inc., owner of the Taco Bell, Pizza Hut and KFC restaurant chains, agreed to pay $63 million for a 20 percent stake in China’s Little Sheep Group Ltd. to win more diners in the world’s most populous nation.

The U.S. restaurant operator will buy 205.5 million shares in the Chinese hot-pot specialist, Little Sheep said in a Hong Kong stock-exchange filing today. Yum is buying the stake from controlling shareholder Possible Way International Ltd., and 3i Group Plc, Prax Capital Fund I LP and Billion Year International Ltd.

Yum is getting a stake in a 375-restaurant chain in the only economy among the world’s five biggest that grew in the fourth quarter. Louisville, Kentucky-based Yum is opening a store a day in China, where it’s offering more local cuisine at its East Dawning chain, as well as at KFC and Pizza Hut outlets.

“China remains the biggest growth opportunity in the restaurant industry in the 21st century,” Sam Su, vice chairman of Yum! and president of Yum Restaurants China, said in the statement distributed today over Business Wire. Yum! China has about 3,000 stores, contributing 27.7 percent to the U.S. chain’s total revenue in 2008.

Little Sheep posted its biggest gain in eight weeks, rising 13.7 percent to close at HK$2.98 in Hong Kong trading. The stock has climbed 44.7 percent this year, compared with a 5.3 percent decline in the city’s benchmark Hang Seng Index.

Perfect Partnership

“We see a perfect partnership here and a perfect time for Yum! to go in and work as a partner to continue the next phase of growth,” Anna Cheung, a 3i partner and co-head of the company’s China operations, said in a telephone interview in Beijing today. The private equity firm generated “over three times return” on its investment in Little Sheep, she said, without elaborating.

“Our job is not to hold public equity, and be a fund manager and ride the stock market cycle,” Cheung said, when asked why the stake was being sold now.

The acquisition is expected to be completed “by this summer,” Kentucky-based Yum! said in its statement.

3i, which holds 11.32 percent of Little Sheep, and Prax, which has 2.6 percent, will sell their entire holdings, with the deal to be completed by March 31, the exchange filing said.

Possible Way, which currently holds a 50.86 percent stake in Little Sheep, is selling a 4.98 percent holding and Billion Year International, which owns 11.13 percent is selling a 1.09 percent holding, the statement said. The disposals are conditional on completion of 3i and Prax’s sales and necessary regulatory approvals, it said.

To contact the reporter on this story: Wing-Gar Cheng in Beijing at wgcheng@bloomberg.net

Last Updated: March 25, 2009 05:35 EDT