Yum! Brands Will Offer to Buy All Outstanding Shares of Little Sheep Group

Yum! Brands Inc., owner of the KFC and Pizza Hut fast-food chains, will seek to buy all outstanding shares in hotpot-restaurant operator Little Sheep Group Ltd. (968) to further expand in China.

Yum may bid for all shares that it doesn’t already own or are held by parties acting in concert with it, according to separate releases from Yum! and Little Sheep yesterday. No formal offer has yet been made, Yum said in a statement.

“Buying Little Sheep will be a very good complement to Yum’s business as it’ll be the first Chinese-style non-fast food chain for Yum, with great expansion potential around the world,” Titus Wu, an equity analyst at DBS Vickers Hong Kong Ltd. with a “buy” rating on Little Sheep, said by telephone today.

Louisville, Kentucky-based Yum, with about half of its locations outside the U.S., said in February that sales at Chinese stores open at least 12 months increased 8 percent in the fourth quarter. The company, which also owns Taco Bell, drew about a third of revenue last year from China, where it competes with McDonald’s Corp.

Discussions are at “a preliminary stage only” and “subject to obtaining all necessary regulatory approvals for the transaction,” Little Sheep said in a filing to the Hong Kong stock exchange yesterday.

Little Sheep

The U.S. restaurant operator increased its Little Sheep stake to 27.2 percent from 20 percent last year. Little Sheep’s 2010 net income gained 21 percent, according to a company filing last month.

Little Sheep controlling stockholder Possible Way International Ltd. holds 29.9 percent, or 308 million shares, according to its statement. Yum is deemed to have an interest in this stake through a 2009 agreement with Possible Way. Little Sheep Chairman Zhang Gang owns 2.4 percent of the company.

Baotou, Inner Mongolia-based Little Sheep operates 179 self-owned restaurants and another 274 through franchises in mainland China, according to its 2010 annual report. The company plans to open 40 outlets this year.

The purchase “would further solidify Yum’s position as the leading restaurant company in fast-growing China,” and so will be good news, provided it takes place at a “reasonable” price, Mark Kalinowski, a research analyst at Janney Montgomery Scott LLC, wrote in a note to clients yesterday.

Kalinowski, who owns Little Sheep stock in his personal account, recommends buying Yum shares.

Fast Food Competition

Yum operates more than 3,200 KFCs in over 700 Chinese cities, and has 520 Pizza Hut eateries in the country, according to its website. McDonald’s, the world’s largest restaurant operator, has about 1,300 outlets in China.

Little Sheep will continue to be suspended from trading in Hong Kong pending a further announcement on the possible buyout, it said. The stock gained 0.4 percent to HK$5 on April 21, the last day of trading. It’s increased 1.8 percent this year, against a 4.6 percent gain in the benchmark Hang Seng Index. (HSI)

To contact the reporter on this story: Wendy Leung in Hong Kong at wleung12@bloomberg.net

To contact the editor responsible for this story: Chua Kong Ho at kchua6@bloomberg.net

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