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Yum looks to buy Little Sheep brand in China

Company makes preliminary offer for ‘hot pot’ casual-dining chain

Yum! Brands Inc. made a move Tuesday to expand its business in China with a preliminary proposal to buy the Little Sheep casual-dining chain in that country.

Yum already owns 27.2 percent of outstanding shares of Little Sheep, which specializes in “hot pot” dishes. No formal proposal has been made and still needs to be cleared by financial regulators, Yum said in a statement. The company intends to leave a small minority stake in the brand to be held by the chairman and founding executives of Little Sheep.

The hot-pot chain is based in Baotou, Inner Mongolia, and is listed on the Hong Kong Stock Exchange.

A larger stake in Little Sheep would complement Yum’s current stable of nearly 4,000 restaurants in China that has powered much of its earnings growth in recent years. Sales growth for the KFC and Pizza Hut chains in China will be driven in the near term by initiatives like breakfast, home delivery and 24-hour service, company executives have said.

In its most recent earnings call for the first quarter of 2011, the company disclosed that its China division logged a 13-percent increase in same-store sales, driven by a 15-percent jump in transactions, the largest rise in guest counts in China since 2004.

During that call, Yum chief executive David Novak shared one of the few Chinese phrases he claims to know, which translated to “build more,” to express the company’s confidence in its prospects in China.

“Our China business continues to fire on all cylinders,” Novak said. “We’ve never been more confident in the strength and growth prospects of our business.”

Chief financial officer Rick Carucci added that the high-growth, high-inflation environment in China — Yum is forecasting commodity price increases of 7 percent and labor cost inflation in the mid-teens in China this year — would pressure Yum to make smart decisions about real estate in the country. However, he said China’s rate of growth and urbanization continues to give restaurants like KFC, Pizza Hut and Little Sheep room to grow.

“If you look at real estate in general, we are seeing fairly large increases in rent … especially in tier-one cities,” Carucci said. “In those situations, we have done more relocations and things like that because it is harder to justify the new rent that you end up paying.

“In terms of access to real estate, the things that have driven historical development we think are going to continue to drive future development, and you’re continuing to see huge investments in infrastructure,” he added. “We haven’t seen any let-up in any infrastructure investment or investment in new cities that the Chinese government has been making, and so we still see people moving from the countryside into the city. With that, you do get new opportunities.”

Louisville, Ky.-based Yum operates or franchises more than 38,000 KFC, Pizza Hut, Taco Bell, Long John Silver’s and A&W restaurants in more than 110 countries. The company also owns the East Dawning fast-food chain in China.

Contact Mark Brandau at [email protected].

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