Summary
- Yum! now officially has two activist investors.
- Corvex has detailed a plan to separate the company into two parts.
- One would be a play on the Chinese middle glass and the other an asset light franchise business in the U.S.
Yesterday we talked about why
Dan Loeb loves Yum! Brands (NYSE:
YUM), where the focus was getting its China operations back on track. As well as shifting Pizza Hut's focus in the U.S. His core thesis includes a rebound in China and increasing the franchising of stores outside of China, from 91% of total stores to 95%.
As far as China, Loeb's Third Point
1Q letter detailed the fact that there's plenty of room to get customers returning back to stores. Of note, Its average China KFC brings in $1.3mm today with a 15% operating margin, versus the $1.7mm and 20% margins they had before the 2012 safety concern.
As mentioned before, Yum! has been
activist bait for awhile, in terms of the fact that there's long been an opportunity to split its China operations from its domestic business. Well now, we finally have an activist pushing for this break up.
Keith Meister of Corvex Management was rumored to have taken a stake in Yum! last Friday and he confirmed it yesterday. It's his fund's second largest position ever, with the fund owning $1.5 billion worth of Yum! stock - which on a pro forma basis puts it as his second largest portfolio holdings behind Williams Companies.
Meister's core thesis is to spinoff the Chinese operations and then allow it to enter into a franchise agreement with the U.S. operations. The key issue is that the two businesses are very different. It's tough to run a U.S. focused operation and keep up with changing regulation and safety issues in China.
But it goes beyond that as I alluded to above. Yum!'s business outside of China is almost entirely franchised. Meanwhile, Yum! still owns over 80% of its stores in China. The key argument is that by splitting up the businesses, you could attract more shareholders - because in its current state, investors will always "hate" half of the business; they're just too different.
With the spin off, you'd have a Chinese fast food company that's leveraged to the growing middle class there. Meister noted that the struggles of KFC China were over.
The company could then focus on its U.S. operations, where it needs to better position Pizza Hut (in respect to competing with Domino's), as well as growing Taco Bell. There's also the fact that KFC in the U.S. is lagging major peers like Popeyes and Chick-fil-A.
Granted, the stock has had quite a move over the last year or so. Per Corvex, the upside is to $130 in the least, and $160 if China recovers quicker than expected; suggesting 45% to 75% upside.
Here's the response we got from Yum! Brands,
"The YUM Board of Directors regularly reviews strategic options to optimize long-term shareholder value. We welcome the input of our shareholders and remain committed to explore all options to enhance long-term shareholder value. In any event, our focus is to get our China business back on track. We are making steady progress as evidenced by our first quarter results, and we expect to have a strong second half of the year and deliver at least 10% EPS growth in 2015. "
In the end, if Corvex can get Third Point behind its spinoff plan, which shouldn't be a problem, there's still more upside to be had here.
Originally Posted by SMR
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