China’s Ministry of Commerce approved Yum! Brands Inc.’s plan to acquire Little Sheep Group Ltd., the Chinese operator or franchisor of 480 Little Sheep “hot pot” restaurants.
Once the deal has been finalized, Louisville, Ky.-based Yum will own 93.2 percent of Little Sheep. The purchase will enable Yum to grow its full-service presence in China.
The remaining 6.8-percent stake in Little Sheep will belong to the chain’s founders, Zhang Gang and Chen Hongkai.
Yum, which already had owned 27.2 percent of Little Sheep, first announced its intentions to purchase the majority of the company April 26 and entered a formal bid for a purchase price of $682 million on May 13.
“We are pleased we have received approval from the Ministry of Commerce to proceed with our proposed privatization of Little Sheep restaurants,” said Sam Su, chairman and chief executive of Yum! Restaurants China.
“This is another important step in executing our strategy of being ‘rooted in China, part of China,’” he said. “We look forward to completing this transaction and are confident we can strengthen the Little Sheep brand and satisfy consumer demand for the hot pot concept.”
Yum currently has 4,100 locations in China.
Little Sheep specializes in Mongolian hot pot, a dish in which customers dip raw meat or vegetables into a communal pot of boiling broth. The full-service brand has 458 locations across China and 22 units outside that country.
Most of Yum’s locations in China are in the quick-service sector. As of the third quarter ended Sept. 3, the company had 3,475 KFC units and 127 Pizza Hut Home Service locations in China, compared with 564 Pizza Hut casual-dining restaurants.
Sara Senatore, restaurant industry analyst with Bernstein Research, wrote in a research note that Yum’s interest in Little Sheep “reflects its intent to be the leading brand in every significant category among restaurants in China.”
“We believe the decision to increase its stake reflects Yum’s intent to be a leading brand in the ‘significant categories’ of Asian quick service and Asian full service,” she wrote. “Yum dominates the Western QSR and FSR segments with KFC and Pizza Hut, but is largely absent from the Asian corollaries, which are dramatically larger markets.”
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The market for Asian quick-service concepts is eight times larger than that for Western quick-service brands, Senatore noted, and the Asian full-service market is 150 times larger than that for Western concepts.
She added that getting into Asian restaurant concepts in China through an acquisition like this may make sense, given the difficulties Yum has had growing its proprietary quick-service brand in China, East Dawning, which has seen “only limited success and modest unit growth.”
“This experience with East Dawning has contributed to Yum’s interest in pursuing the Asian segment through acquisition rather than internal development,” Senatore wrote. “Specifically, it is arguably the case that Yum lacks the first mover and unique branding advantages that it has with its Western brands. Instead, it faces entrenched local players who have longer histories and arguably greater understanding of local tastes and preferences.”
Yum derives the bulk of its operating profit and sales growth from its China segment. In the third quarter, Yum’s China division reported a 19-percent increase in same-store sales, compared with a gain of 3 percent in Yum Restaurants International and a 3-percent decline in Yum’s domestic system. The company is projecting a record 600 new stores opening in China for fiscal 2011.
The deal still awaits Yum’s shareholder approval.
The company operates or franchises more than 38,000 locations of Pizza Hut, Taco Bell and KFC in more than 110 countries.