HONG KONG Yum Brands Inc (YUM.N), parent of the KFC, Taco Bell and Pizza Hut fast-food chains, has offered to buy out China's Little Sheep (0968.HK) for $586 million, paying a premium to introduce the popular hot pot chain to a global audience and sending the Chinese restaurant shares to a record.
Analysts said the deal was positive for both Yum Brands as it expands in China and for Little Sheep, which has more than 300 hot-pot restaurants, primarily in China, as it would help save costs.
Little Sheep said China's highly fragmented restaurant industry had seen competition intensify in recent years, and going private would reduce its exposure to market volatility and give it quicker access to growth capital.
"The deal is a positive for both parties," said Ample Capital analyst William Lo.
"It has synergy for both Yum and Little Sheep as they can share and save costs on logistics. (Little Sheep) can share costs with Yum's other operations such as Pizza Hut in China."
Lo said there was still room for Little Sheep to grow in China.
Yum offered to buy out most of the shares of Little Sheep that it does not already own at HK$6.50 each in cash for up to HK$4.56 billion, taking its stake to 93.2 percent from 27.2 percent. The price represents a 30 percent premium over the previous close.
"It is positive to Little Sheep with a premium of 30 percent, while Yum can increase product diversity," said Pacific Epoch retail analyst Marie Jiang.
Global food operators wanting to enter the China market have had to tread carefully in the past few years.
Coca-Cola Co (KO.N) launched a $2.4 billion bid for Chinese juice producer China Huiyuan Juice Group Ltd (1886.HK) in 2008 but the deal was blocked the following year by the government on competition concerns.
Little Sheep is seen differently in terms of brand-name effect and the deal with Yum is expected to have a higher chance of receiving regulatory approval, Jiang said.
Yum had said earlier that it would wait for approval from regulators before making a formal offer for the remaining shares in the chain.
SHARES AT RECORD HIGH
News of the deal lifted Little Sheep shares to an all-time high of HK$6.38 on Friday. The stocks ended up 24.5 percent at its record close at HK$6.14. This was compared to a 0.88 percent gain in the benchmark Hang Seng Index .HSI.
"The (offer) price is fair and is not expensive as it represents about 30 times P/E, which is similar to other restaurant operators such as Ajisen (China) Holdings Ltd (0538.HK)," said Lo from Ample Capital.
Analysts said the deal also reflected a strategy by global food operators, such as McDonald's Corp (MCD.N), in tapping the China market by localizing their products to suit local tastes.
Based in China's Inner Mongolia province, the Little Sheep chain is known for its fresh mutton and beef, colorful restaurants. It is also known for its environmentalist consciousness in using paper less offices, energy-saving electrical appliances and discouraging the use of disposable utensils.
"China is an important market for Yum Brands," said Sam Su, chairman and chief executive of Yum's China Division.
"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," Su said, without giving a timetable.
Chinese hot pot is meat and vegetables cooked in a variety of broths at one's table. Popular with families and groups, diners order raw chicken, fish, other meats and vegetables they cook themselves in a central pot or individual pots at each seat.
Little Sheep would stick to its plan of opening 40 outlets this year in China, Chairman Zhang Gang told a news conference.
Zhang and another founder Chen Hongkai will hold 6.8 percent of the company after completion of the proposed deal.
The China division of Yum Brands opened more than 500 new restaurants in 2010. KFC continues to be the number one fast-food brand in the mainland with more than 3,200 outlets in more than 700 cities. It also has 520 Pizza Hut restaurants in more than 130 cities.
(Additional reporting by Terril Jones in Beijing; Editing by Chris Lewis and Dhara Ranasinghe)