Exclusive: CIC ends talks with Yum Brands over China business - sources

(Reuters) - A consortium that includes sovereign wealth fund China Investment Corp (CIC) and U.S. buyout firm KKR & Co KKR.N has ended discussions to buy a stake in Yum Brands Inc's YUM.N China unit, according to people familiar with the matter.

A man walks past a logo of KFC, outside a restaurant in Shanghai, China, July 30, 2015. REUTERS/Aly Song/File Photo

Louisville, Kentucky-based Yum Brands, owner of the Pizza Hut and KFC fast-food chains, has been looking to spin off its 7,205 China restaurants by the end of 2016, amid pressure from activist investor Corvex Management, whose founder, Keith Meister, is on Yum’s board.

One of the main sticking points was the CIC consortium’s desire to have majority control in the China business, something Yum would not entertain because of the negative tax implications on proceeds, the people said on Friday.

CIC’s consortium also had concerns around achieving the investment returns it desires in a capital-intensive business amid a slowing Chinese economy, the people added, asking not to be identified because the negotiations were confidential.

“Our board is fully committed to maximizing shareholder value, and we are making great progress towards the separation of our China business by year-end and at the same time returning significant capital to our shareholders,” a Yum spokeswoman said.

“Our China business is a large, unique and valuable asset ... We’re confident that, as a well-capitalized, standalone public company, it will have a long runway for continued growth,” she added.

KKR declined to comment, while CIC did not respond to a request for comment.

Separately on Friday, Yum unveiled a $4.2 billion share buyback and declared a quarterly dividend of 46 cents per share. The move follows its previous commitment to return $6.2 billion of capital to shareholders before the planned separation of its China business.

Yum, still the largest fast-food chain in China, has been losing ground to McDonald's Corp MCD.N as they both strive to revive sales in the teeth of growing competition from local rivals and a slowing economy. In recent years, it has sought to address challenges in supply chain control and food safety.

It is common for newly public listed companies in China to secure so-called “anchor investors” prior to a public listing. The spin-off is expected to proceed with or without an anchor investor.

The auction for a roughly 20 percent stake in Yum’s China unit also includes Singapore state investor Temasek Holding and another private equity-backed consortium, Reuters reported this week. Second round bids for the auction are due by the end of this month.

Questions continue to persist around valuation, as Yum pursues its China unit spin. The entire China unit is valued between $8 billion and $11 billion, based on its core earnings of about $1 billion, according to the sources.

“I will tell you as a large shareholder, the Yum board selling this business for $7 billion or $8 billion is not the right thing, and I don’t think anyone would disagree about that,” Corvex’s Meister told CNBC in an interview in April. Corvex owns 5.2 percent of Yum, according to Thomson Reuters data.

Reporting by Lauren Hirsch and Greg Roumeliotis in New York; Additional reporting by Denny Thomas in Hong Kong and Saeed Azhar in Singapore; Editing by Tom Brown, Bernard Orr