Yum's Detente With Activist Investor Signals China Shake-Up

  • Corvex's Meister has called for Yum to spin off its China unit
  • Company has been reviewing options with advisers for a year

Yum! Brands Inc. is adding one of its most vocal investors to the board, a move seen as a prelude to a possible spinoff of its China division.

Keith Meister.
Keith Meister.
Photographer: Andrew Harrer/Bloomberg

The fast-food giant, which is finishing a review of its strategic options, announced that Corvex Management founder Keith Meister will become a director on Friday. Meister, a protege of billionaire Carl Icahn, has called on Yum to break off its Chinese operations, saying that the Asian market could be better served with a more focused business. Meister has said that the move could generate an additional $16 a share in value for Yum.

Investors have been clamoring for changes at Yum since a slump in China torpedoed its sales and profit. The company has been coping with the fallout from a food-supplier investigation, as well as a turbulent local economy. Still, Yum gets more than half its revenue from China and the country is viewed as a long-term growth driver. The Asian nation has a burgeoning middle class that could increasingly be dining at Yum’s KFC and Pizza Hut chains.

The company isn’t serving the market well as one global entity, Meister has argued. The risks and opportunities are different than in the U.S., in part because most of the Chinese Yum restaurants are company-owned -- not franchised.

“There isn’t a mature franchise market,” Meister said in May when he began the drumbeat for a spinoff. The new entity could be “levered to the endless growth, to the Chinese middle class," he said.

‘Clear, Obvious’

"We think there is a clear, obvious way to create value, and that’s to separate the business,” he said at the Sohn Investment Conference. Corvex owned about 3.6 percent of Yum’s stock as of June 30, making it the fourth-largest investor, according to data compiled by Bloomberg. That stake is now almost 5 percent, Yum said.

The restaurant company also gave a financial update on Thursday, saying that adjusted profit per share this year would range from flat to a low-single-digit percentage gain. That decreased the lower end of a forecast it provided last week.

Meister’s appointment to the board sent the stock up as much as 6 percent in late trading on Thursday, a sign investors support the idea of overhauling the China business. The shares, down 4.9 percent this year through Thursday’s close, rose 1.9 percent to $70.56 as of 10:06 a.m. in New York on Friday.

‘Multiple Avenues’

Meister, 42, said on Thursday that he’s had “constructive dialogue” with Yum over the past several months. His appointment as a director expands the board to 14 members.

“This is a company with multiple avenues for unlocking significant long-term value, and I look forward to working with the board and management to expeditiously finalize a plan,” he said in the statement.

Analysts also have suggested that the company could spin off its Taco Bell chain, which has been a bright spot recently. That business doesn’t have a presence in China.

Yum’s China division has almost 7,000 restaurants units -- mostly KFC and Pizza Hut locations -- and more than three-quarters of them were company-owned. Globally, only about 21 percent of Yum restaurants are owned by the company.

Owning a restaurant outright can be lucrative when times are good, but it brings higher risk and costs. Most major fast-food chains, including McDonald’s Corp. and Wendy’s Co., are selling more of their locations to franchisees.

Yum, based in Louisville, Kentucky, is planning to discuss long-term strategies at its investor conference in December.

“This has been a comprehensive, yearlong process, working with our financial and legal advisers,” Chief Executive Officer Greg Creed said in the statement. “We are near its conclusion.”

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