Hillhouse, KKR Said to Weigh Deal for $14 Billion Yum China

(Bloomberg) -- Hillhouse Capital and KKR & Co. are among firms exploring a potential acquisition of Yum China Holdings Inc., the $14 billion U.S.-listed operator of KFC and Pizza Hut brands on the mainland, people familiar with the matter said.

The private equity firms are talking to banks about financing for a possible deal, said the people, who asked not to be identified because details are private. Potential suitors could seek to form a consortium to jointly bid for the business, said the people.

Yum China shares rose 11 percent in U.S. trading Thursday, the most since its 2016 listing, after The Information reported Hillhouse’s interest, citing unidentified people.

Yum! Brands Inc. spun out the Chinese business less than two years ago after losing market share amid changing tastes and increased local competition. China’s biggest fast-food operator has struggled to attract younger diners to its Pizza Hut restaurants, despite overhauling its mobile app, upgrading its menu and enlisting celebrities to tout the U.S. brand.

Deliberations about any potential bids are at an early stage, and they may not result in a deal, said the people. Representatives for Hillhouse and KKR declined to comment. An external representative for Yum China said in an email that the company doesn’t comment on rumors or market speculation “regarding these sorts of matters.”

Digital Economy

Hillhouse, an early backer of Tencent Holdings Ltd. and JD.com Inc., could help Yum China’s appeal with the country’s growing class of tech-savvy consumers.

“The transformation of traditional bricks-and-mortar consumer business into entities that suit China’s new digital economy has been the primary focus of Hillhouse for the last two to three years,” Bloomberg Intelligence analyst Catherine Lim said. “The group is arguably one of the most experienced in what works and what will not in China.”

Hillhouse and CDH Investments bought Belle International Holdings Ltd. in a $6.8 billion deal last year with plans to improve the footwear retailer’s digital platform in China. 

Yum China operates more than 8,100 restaurants in over 1,200 cities and towns across mainland China, its website shows. In addition to the Taco Bell brand, it also operates East Dawning outlets and the Little Sheep chain of Mongolian hot pot restaurants, its attempt to appeal to younger patrons who often prefer Chinese-style options.

The fast-food company’s same-store sales missed analyst estimates in the latest quarter, with a 5 percent growth at KFC offset by a decrease of the same amount at Pizza Hut.

McDonald’s Corp. agreed to sell a controlling stake in its China and Hong Kong operations last year for about $1.7 billion. Chinese state-backed conglomerate Citic Ltd., Citic Capital Holdings and U.S. private-equity firm Carlyle Group LP bought an 80 percent holding that valued the business at as much as $2.08 billion.

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