Deals

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

A reviving business can be hard to let go of, especially when the option is giving a seat at the table to the Chinese government and ceding control of the country's top fast-food operator.

Back in Favor
Yum! Brand shares have been outperforming the Dow this year as China sales recover
Source: Bloomberg

A consortium backed by China Investment Corp. withdrew its bid for control of Yum! Brands' Chinese business after failing to agree on a price with the operator of KFC and Pizza Hut eateries in the nation, a person with knowledge of the matter said. The consortium, which also includes KKR and Baring Private Equity Asia, valued Yum at about $8 billion, about 20 percent less than what Yum was seeking, the person said.

China accounts for about half of Yum's sales and was a millstone for the U.S. firm as recently as October, when the group announced plans to spin off the unit by the end of 2016 to create a more focused business. At that point, sales in China were just recovering from a spate of food scandals that began in 2012, including allegations that its suppliers fed chickens antibiotics, a bird-flu outbreak, and sales of expired meat.

Those travails, combined with a slowing economy and increased competition from both local brands and McDonald's, eroded Yum's market share. Even so, KFC -- China's first major Western fast-food chain after it opened an outlet near Beijing's Tiananmen Square in 1987 -- remains the top seller, accounting for three-quarters of Yum's operating profit in China. Last year, KFC's share of the Chinese fast-food market was 3.6 percent, down from 5.2 percent in 2010, according to Euromonitor.

(Still) Big in China
Yum! Brands' KFC chain has seen its share of the Chinese fast food market decline, but it remains the leading brand
Source: Euromonitor

Despite the overall market-share decline, things are looking up. Yum's China same-store sales rose 6 percent in the first quarter, led by 12 percent growth at KFC, thanks to "bucket meals" sold during the Chinese New Year holidays.

On the Mend
After a string of food scandals that hit sales, revenue at Yum China is rising again
Source: Bloomberg Intelligence

What's best for Yum China is probably the original plan: List the unit in New York, and maybe Hong Kong too, rather than messing around with stake sales. That way it could earn the IPO proceeds to fund a promised multibilllion-dollar stock buyback, and still control a rebounding business. While China has lost some of its luster as an investment in recent years, there's nothing like a revival play.

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

To contact the author of this story:
Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net

To contact the editor responsible for this story:
Paul Sillitoe at psillitoe@bloomberg.net