HONG KONG (Reuters) – U.S. restaurant operator Yum! Brands said it agreed to buy about 20 percent of Chinese hot-pot chain operator Little Sheep for $63 million, as foreign investors eye a bigger slice of China’s food bill, reckoning cheap and fast food demand can withstand the country’s economic slowdown.
Little Sheep (0968.HK) said on Wednesday Yum! Brands (YUM.N) would buy the stake at HK$2.40 per share, an 8.4 percent discount to its Tuesday close, sending Little Sheep shares up by more than a fifth.
Yum! Brands, which operates fast-food chains including KFC, Pizza Hut and Taco Bell, is buying the stake from British private equity firm 3i Group and others.
While the outlook for the restaurant industry globally has weakened as both high-end expense-account customers and ordinary diners tighten their belts, cheaper Chinese chains are attracting foreign investors who see a 1.3 billion population with more money to spend.
Some analysts expect Yum! Brands may want to buy more Little Sheep shares as it looks to add a new channel for profits in China.
“Yum! knows China’s food markets very well and it certainly wants to expand in different areas to diversify its profit streams,” said Guo Changsheng, a Shanghai Securities analyst.
“If it wants to have significant influence at Little Sheep, I think it will increase its stake in the future.”
Yum! Brands has already set up KFC, Pizza Hut and Taco Bell outlets across China, where it faces tough competition with rival McDonald’s Corp (MCD.N).
KFC, well known for its fried chicken wings, does not compete with Little Sheep, which is best known for its mutton hot-pot.
Little Sheep has 6 percent of China’s about 1.5 trillion yuan restaurant market, according to Euromonitor International, and operated 375 restaurants across China at the end of last year.
Yum! Brands said the deal should be completed by the summer.
PRIVATE EQUITY EXITS
3i (III.L), which led a $25 million investment in Little Sheep in 2006, trebled its returns from the sale of its 11.32 percent stake, a source with direct knowledge of the deal told Reuters.
3i declined to comment on its investment return.
Yum! Brands also bought a 2.6 percent stake in Little Sheep held by China-focused private equity fund Prax Capital, which jointly invested with 3i in 2006. Other parties sold a combined 6.07 percent stake to Yum! Brands.
Little Sheep was one of the highest-profile Asia deals for 3i, led by its co-head of China business, Anna Cheung, in 2006.
“This is a great example of 3i’s ability to generate good returns even in a challenging market environment,” Cheung said.
3i shares hit a record low in late-January on fears it may be forced to shore up its finances through a rights issue or cheap asset sales. It closed its Hong Kong and Shanghai offices and relocated its China dealmakers to Beijing last year to save costs.
Jeff Yao, managing partner and co-founder of Prax Capital, told Reuters the firm was eyeing other potential deals in China’s restaurant chain sector. ($1=HK$7.75)
By George Chen
(Additional reporting by Donny Kwok in HONG KONG and Samuel Shen in SHANGHAI) (Editing by Ian Geoghegan)