Yum! Brands Inc. made a formal proposal Friday to buy the Little Sheep “hot pot” chain in China in a deal reportedly valued at $682 million.
The acquisition, which Yum explored last month, would bring the Chinese brand under Yum’s control and would add hundreds of restaurants to the Louisville, Ky.-based company’s portfolio of nearly 4,000 restaurants in China. KFC and Pizza Hut units make up the bulk of Yum’s stable in China, along with a handful of East Dawning fast-food restaurants.
Through an agreement with Little Sheep Group Limited, Yum will increase its ownership of the chain from the 27.2 percent it already controls to 93.2 percent, leaving the remaining 6.8 percent interest in the company to its founders, Zhang Gang and Chen Hongkai. Yum’s per-share buyout offer of 6.50 Hong Kong dollars, or 84 cents in United States currency, represents a 30-percent premium over Little Sheep’s April 21 closing price of 5 Hong Kong dollars on the Hong Kong Stock Exchange. The New York Times valued the deal at $682 million.
Yum enjoys a lead in system size over rivals like McDonald’s and Starbucks in China, where the company first entered in 1987. Yum began investing in Little Sheep in 2009.
“The restaurant industry in China is highly competitive, but we are optimistic about the outlook and the opportunities,” Sam Su, chairman and chief executive of Yum’s China division, said in a statement. “With strong commitment to the China market and to the Little Sheep business, together with the support from chairman Zhang, Mr. Chen and the existing management, we are confident we can further strengthen Little Sheep’s brand, business model and market position in the industry.”
Su added that Little Sheep’s growth opportunities lie not only within China but in international markets as well.
“In the long term, with its global business network and successful brand-building experience, Yum will work with Little Sheep to explore effective ways of introducing the hot-pot concept and the Little Sheep brand to a wider global audience,” he said.
Yum executives said during the company’s first-quarter earnings call that its China division would focus on initiatives like breakfast, home delivery and 24-hour service as a way to build sales. In the first quarter of 2011, Yum’s same-store sales rose 13 percent at restaurants in China, driven by a 15-percent increase in guest counts.
Based in Shanghai, the China division of Yum has more than 3,200 KFC outlets in 700 cities and 520 Pizza Hut Casual Dining units in 130 cities. Yum! Brands Inc. is the operator or franchisor of KFC, Pizza Hut, Taco Bell, Long John Silver’s and A&W, and the company boasts nearly 38,000 restaurants in 110 countries.