Reporter's Notebook

Should Yum Brands spin off Taco Bell?

Restaurant companies have been under mounting pressure to unload concepts in recent years, but we were nevertheless surprised when one analyst made this suggestion of Yum Brands:

Divest itself of Taco Bell.

Mark Kalinowski, analyst at Janney Capital Markets, said in a recent note on Yum that he’d consider separating Taco Bell. He did allow, however, that Yum might disagree with his thinking.

But Kalinowski also cited “increased chatter about the possibility of eventually separating Taco Bell” among four factors in his decision to upgrade his rating on Yum’s stock to Buy.

Kalinowski noted that Yum’s KFC and Pizza Hut brands are both global in nature, while Taco Bell is mostly in the U.S. It is also adding units stateside, and remains the strongest brand here even though both Pizza Hut and KFC have shown signs of improvement lately. 

Indeed, it’s arguable that Yum’s shareholders would get a bigger benefit if they had separate stocks for Taco Bell and for Yum’s global KFC and Pizza Hut brands.

Taco Bell represents about 13.7 percent of Yum’s revenue so far this year, and 19.8 percent of its profit. Yet it is still dwarfed by Yum China, which amounts to 53.1 percent of revenues and 42.6 percent of Yum profits.

If it were spun off, Taco Bell could get out of the immense shadow that is Yum’s Chinese operations. Assuming that a separation would come in the form of a public company spinoff, investors would be able to focus on the fact that Taco Bell is the only national QSR Mexican chain. It would undoubtedly get a strong valuation in today’s market.

There is also a widely held belief that restaurants can operate better with fewer brands. Any restaurant company that owns more than one brand will likely be asked, at one point or another, whether it would be better off divesting itself of one or more concept.

In theory, restaurant companies can concentrate their attention on fewer concepts. That’s why Darden Restaurants sold Red Lobster. Likewise, Bloomin’ Brands said that Roy’s Restaurants would get more attention as a standalone concept.

That said, there are restaurant chains that are actively buying other concepts right now. Burger King wants to buy Tim Hortons. DineEquity is looking for a third concept. Buffalo Wild Wings has been acting like a hedge fund in buying growth chains like Rusty Taco and PizzaRev.

And there are plenty of reasons for Yum Brands to not consider such a spinoff. For one thing, it’s doing well. And public companies are, for the most part, reluctant to part with brands that actually perform (McDonald’s spinoff of Chipotle and Wendy’s spinoff of Tim Hortons notwithstanding).

In addition, Yum periodically has problems in China. Revenues in the most recent quarter, for instance, fell by nearly $200 million amid supplier concerns. Taco Bell’s strength in the U.S. acts as a hedge against problems that may crop up there. So we wouldn’t bet on a Taco Bell spinoff anytime soon.

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