Taco Bell Would Be Yummy Alone

Investors want more value unlocked, and the Mexican chain can stand alone.

Investors Crave More From Yum! Brands

Shares are down 7 percent in the past year, despite shareholder-friendly moves to spin off China business

Source: Bloomberg

It was only a matter of time before Taco Bell merged its quesadilla and chalupa offerings into the new "Quesalupa," which it unveiled during the Super Bowl. It was a no-brainer to combine the overwhelmingly cheesy goodness of a quesadilla with the chalupa shell's perfect crunchiness.

Now the Mexican-inspired fast-food chain should consider another inevitability: An eventual spinoff from its parent company, Yum! Brands. 

The operator of KFC, Pizza Hut and Taco Bell chains is already in the process of splitting from its China business, from which it derives more than half its revenue, but which has suffered through a string of food safety  issues that have dragged down the overall company. That move, announced in October, came in response to pressure from activist investors including Carl Icahn protege Keith Meister's Corvex Management and Dan Loeb's Third Point, which argued that the company was worth more as separate businesses.

While the initial announcement to spin off the China business led to a small bounce in the stock, Yum's shares are still down around 9 percent this year, compared with a roughly 12 percent rise in the S&P 500 restaurant index. Clearly, the idea of a China spinoff didn't unlock enough value to meaningfully boost the share price, and investors are craving more. And with Meister staying on Yum's board even after getting what he wanted, it doesn't look like the activists are going away anytime soon. 

To make these shareholders happier, Yum could also consider shedding its Taco Bell division. It can certainly survive on its own: Unlike the company's other brands, Taco Bell is almost exclusively located in the U.S., making it largely immune to the currency risks and global growth concerns worrying many investors these days. Plus, the taco chain has been killing it on the sales front: Taco Bell customers come into the chain once every 11 days, compared to once every 59 days at KFC. And as Taco Bell has embraced healthier fare such as cage-free eggs and lower-sodium menu items, it is preying on the recent weakness of its higher-shelf competitor Chipotle

Taco Bell's Appetizing Sales Growth

Yum! Brands year-over-year percentage change in same-store-sales by chain

Source: Bloomberg

Remember, the only reason KFC, Pizza Hut, and Taco Bell are under the same corporate umbrella is that they were once what Yum describes as "the ugly ducklings" of PepsiCo, which spun them off two decades ago. Sure, the three chains might benefit from shared access to talent or real estate. Having three separate lines of business could lead to more diversification for shareholders when one particular area of the market sours.

But Yum decided to reorganize its corporate structure a few years ago around three brand divisions, rather than geographies, because businesses run better when employees are all focused on driving sales to a single brand. That same logic makes it hard for the parent company to allocate resources and focus on KFC, Pizza Hut, and Taco Bell all at the same time, according to Nomura analyst Mark Kalinowski. He has advocated for a Taco Bell spinoff since he started covering Yum for Nomura last October.

Yum told investors in December it was throwing its weight behind revamping Pizza Hut, saying it had "the greatest potential" of the three brands -- even though the pizza chain is struggling to keep up with value pricing and digital offerings from Domino's and other competitors. While Yum focuses on Pizza Hut, what happens to its goal of opening up 1,000 new Taco Bell locations? Or Taco Bell's new dollar menu and loyalty program?  Or what about the nascent Taco Bell website, which is driving a 20 percent check increase on online orders? 

There are definite hurdles to a Taco Bell spinoff. Taco Bell is Yum's best-performing brand, and it will be hard to give that up -- especially considering Yum CEO Greg Creed ran the Taco Bell business for nearly four years before becoming chief executive of the parent company.

Still, when explaining why Yum eventually decided to spin off its China business, which had been a major growth driver, Creed said, "what got you here doesn't always get you there" -- a folksy way of saying a relationship that worked in the past might not be the right relationship for the future. The same may be true for Taco Bell. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Shelly Banjo in New York at sbanjo@bloomberg.net

    To contact the editor responsible for this story:
    Mark Gongloff at mgongloff1@bloomberg.net

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