(Reuters) — Yum Brands Inc (YUM.N), owner of KFC and Pizza Hut, is in talks with private equity firms including KKR & Co LP (KKR.N) and Hopu Investments to sell a minority stake in its China operations as it prepares to spin off the once booming unit, two sources familiar with the plans said on Thursday.
Several other Chinese investors were also looking into the deal, said the sources, who declined to be named.
The potential investment comes after a difficult few years for Yum in China, its biggest market by sales, where a series of food-safety scandals and management mis-steps has dented its reputation with diners.
The chain plans to spin off its 6,900 restaurants in China, which account for about half of the company’s total sales, by the end of 2016. Yum China will list on the New York Stock Exchange, and possibly in Hong Kong.
The China business could be valued at about $10 billion, analysts and bankers estimate, based on its core earnings.
Yum, still the largest fast food chain in China, has been losing ground to McDonald’s Corp (MCD.N) as they both strive to revive flagging sales in the teeth of growing competition from local rivals and a slowing economy.
“We continue to make good progress since we announced the transaction separating Yum and Yum China,” a Yum spokesperson said by email. “We will provide updates on the transaction at appropriate times, and we won’t comment on rumors or speculation.”
Yum’s China sales dipped 0.4 percent in 2015, after two flat years, underlining how managers have struggled to repair its reputation since the food safety scares.
Chinese diners once flocked to its outlets – and to McDonald’s – helping drive revenue growth of nearly 30 percent a year between 2006 and 2012.
NO SILVER BULLET
Yum China, under new boss Micky Pant, is facing a cocktail of challenges in China: a slowing fast-food market, the rise of food delivery apps creating an online price war, and a lack of local franchise partners.
Analysts said securing private equity investment would be no silver bullet for recovery, but could help drive faster store growth and fund a makeover for older stores.
“My guess is that they are looking at sources of funding so they can refurbish or revamp their stores here or expand more aggressively,” said Ben Cavender, Shanghai-based principal at China Market Research Group.
Hopu Investments, a China-based private equity firm co-founded by former Goldman Sachs (GS.N) banker Fang Fenglei, was not available for immediate comment. KKR declined to comment.
Singapore state investor Temasek Holdings [TEM.UL] had been approached about the deal, but it was unclear whether talks were ongoing, one source said. Temasek declined to comment.
Other investors looking into the deal included Baring Private Equity Asia, said the Wall Street Journal, which initially reported the deal. Yum appeared to be intent on selling a 19.9 percent stake to avoid a big tax bill, the Journal said. Baring declined to comment.
Yum’s sales at established restaurants in China rose 2 percent in the fourth quarter, the second increase in 1-1/2 years. Yum China earned $1 billion before taxes, interest, depreciation and amortization (EBITDA) last year.
Shares in Yum closed nearly 2 percent up at $80.55 on Wednesday. The stock has gained 10.3 percent since unveiling plans to spin off the China business last October.
(Reporting by Ramkumar Iyer in Bengaluru, Saeed Azhar in Singapore, Elzio Barreto in Hong Kong, Adam Jourdan in Shanghai; Editing by Lincoln Feast and Will Waterman)