Yum Plans Little Sheep Buyout Valuing Chain at $862 Million

Little Sheep Says Yum! Puts Forward Privatisation Proposal
A file photo shows a man rides his bicycle past the a Little Sheep hotpot restaurant in Beijing. Photographer: Stephen Shaver

Yum! Brands Inc., owner of the KFC fast-food chain, offered to take Little Sheep Group Ltd. private in a deal that values the operator of hot pot restaurants in China at HK$6.7 billion ($862 million).

The offer is worth HK$6.50 a share in cash, 30 percent higher than the April 21 closing price, the last day of trading before Little Sheep disclosed an approach from Yum, the Baotou, Inner Mongolia-based restaurant operator said in a filing to the Hong Kong stock exchange. Yum already owns 27.2 percent of the stock.

Yum, which gets 36 percent of annual revenue from China, wants Little Sheep to accelerate expansion there. The Louisville, Kentucky-based company, which also owns the Pizza Hut chain, aims to appeal to diners overseas as U.S. sales slow.

“Little Sheep kind of fills a hole for them in their China portfolio -- most of their concepts are Western concepts,” said Larry Miller, an analyst at RBC Capital Markets in Atlanta. The purchase may mean “less share buybacks or debt reduction this year,” he said. He rates the shares “outperform.”

Little Sheep surged as much as 29 percent, an intraday record, to HK$6.38, before closing at HK$6.14 at 4 p.m. in Hong Kong.

‘Fills Hole’

Yum rose 13 cents to $54.86 at 4 p.m. in New York Stock Exchange composite trading. The stock has advanced 12 percent this year.

Yum, led by Chief Executive Officer David C. Novak, had $1.53 billion in cash and $2.06 billion in net debt, as of March 19. The U.S. restaurant operator, which also owns the Taco Bell chain in the U.S., increased its stake in Little Sheep from 20 percent last year.

In January, Yum put its 1,600 Long John Silver’s and A&W All-American Food restaurants up for sale to focus on expansion in China and other regions. Last year, revenue from China rose 12 percent to $4.14 billion from $3.68 billion the year before.

“We are confident we can further strengthen Little Sheep’s brand, business model and market position in the industry,” Sam Su, chief executive officer of Yum’s China division, said in the statement. “There is the potential for further development internationally,” said Su, who is also global vice chairman of the Louisville, Kentucky-based restaurant operator.

Yum’s offer to buy out and privatize the Chinese company is “fair and reasonable,” Zhang Gang, Little Sheep’s chairman, said in a conference call today.

Simmering Pot

Su said in the same conference call that Yum believes Little Sheep has the potential to tap demand in overseas markets for hot pot, a type of cuisine in which various ingredients are cooked in a simmering pot by the diners. There is no specific expansion plan, he said.

“Yum will help to improve Little Sheep’s management skills and bring in more opportunities to tap the global market,” Titus Wu, an equity analyst at DBS Vickers (Hong Kong) Ltd., said by telephone from Hong Kong today. “It’s also good for Yum because it finally has a Chinese company in its global portfolio,” said Wu, who recommends buying Little Sheep’s stock.

The Chinese restaurant company’s 2010 net income gained 21 percent, according to a filing last month.

Overseas Markets

“With a global network and rich experience in brand building, Yum will join hands with Little Sheep to explore feasible ways to introduce hot pot to overseas markets,” Su said.

Little Sheep operated 179 self-owned restaurants and had 274 franchisees in mainland China, according to its 2010 annual report. Zhang reiterated today that the company plans to open 40 outlets this year.

Yum operates more than 3,300 KFCs in China, and has 650 Pizza Hut eateries in the country, according a company filing.

A board committee will consider the bid, which will be done by a so-called scheme of arrangement, with controlling shareholder Possible Way International Ltd. supporting the plan.

The offer is 28 percent higher than the average stock price in the 20 days through April 21, according to data compiled by Bloomberg.

Little Sheep would be delisted from the Hong Kong exchange with Yum holding 93.2 percent of stock and Possible Way controlling the rest.

Little Sheep Chairman Zhang and Chen Hongkai, a non-executive director, will stay on with the company after its privatization, the statement said. The buyout plan requires the approval of the Chinese Ministry of Commerce and other regulatory agencies, according to the statement.

Goldman Sachs Group Inc. is advising Yum and Bank of America Corp.’s Merrill Lynch unit is advising Little Sheep.

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