Yum! Brands' footprint in China is about to get even bigger. The company announced today that it has offered to buy China's Little Sheep for $586 million, which would cover Hot Pot Cuisine, a chain characterized by its proprietary soup base and Mongolian lamb specialties.
The sale and privatization is anticipated to introduce the 300-unit Hot Pot to an international consumer base and provide quicker access to growth capital in a fragmented and highly competitive market.
According to a joint statement, under the proposal, Yum! will, through an indirectly wholly owned subsidiary, offer Little Sheep shareholders HK$6.50 cash per share, representing a 30 percent premium over the company's last closing price of HK$5.00 on April 21.
Yum!'s China Division will operate and manage the business together with Hot Pot's co-founders Zhang Gang and Chen Hongkai, who will continue to participate in the company post-transaction. Yum! will own approximately 93.2 percent of the issued share capital of the company, and the founders will hold the remaining 6.8 percent.
The two companies have worked together since 2009, when Yum! became an investor with a current shareholding of more than 27 percent.
Yum! believes that a stronger partnership with Little Sheep will accelerate the development of the Little Sheep brand.
Hot Pot is highly complementary to Yum!'s business portfolio, according to the joint statement.
"I believe that the strong capability and expertise Yum! possesses in managing world class brands and growing restaurant networks will significantly further Little Sheep's development in China and overseas, and should leave us well positioned to develop into an internationally-recognized restaurant chain," said Zhang Gang, chairman of Little Sheep.
Move a benefit to both brands
Sam Su, chairman and CEO of Yum!'s China Division, added that Yum! is confident it can further strengthen Little Sheep's brand, business model and market position.
"The restaurant industry in China is highly competitive, but we are optimistic about the outlook and the opportunities. We have seen from Little Sheep's previous explorations that there is a demand for the Hot Pot concept in overseas markets and that there is the potential for further development internationally," he said.
Yum! has appointed an independent board committee comprised of non-executive directors to make a recommendation to Little Sheep's shareholders in connection with the proposal. An independent financial advisor will also be tapped.
News of Yum!'s offer boosted Little Sheep's shares to an all-time high of HK$6.38 today, according to Reuters -- a 27.3 percent jump.
Yum!, parent company of KFC, Pizza Hut and Taco Bell, already has a large presence in China, having first entered the country in 1987. China is now Yum!'s top market in terms of restaurant development.
Yum! has a long track record of success in China with its KFC and Pizza Hut brands. The company also has introduced the East Dawning and Pizza Hut Home Service brands in the country.
In China, Yum! Brands outpaces its nearest competitor, McDonald's, by more than 1,000 restaurants and is outpacing its development by roughly 3:1.
Throughout the past three years, Yum! China Division has opened nearly 1,500 new restaurants and has generated a compounded annual growth rate of 29 percent for system-wide sales and 31 percent for operating profit. Yum! China Division is the highest margin and highest return business in the company's global portfolio.
Recent studies indicate the middle class in mainland China is more than 300 million people, creating significant long-term demand for the company's brands and rapid new unit development. Yum! continues to develop toward its goal of having at least 20,000 units over the long term in mainland China.