Bottom line: Yum’s China unit is getting a relatively low value due to the country’s unique risks and slowing economy, while YTO’s backdoor listing is likely to get a cool reception due to intense competition in China’s parcel delivery sector.
Two major IPOs are in the headlines today, one from the more mature fast-food business and the other from the fast-growing but extremely competitive package delivery sector. The first deal has Yum Brands (NYSE: YUM) in talks to sell up to 20 percent of its China division to private equity investors, as it tries to value the unit in the run-up to a highly anticipated IPO. The second has Alibaba-backed (NYSE: BABA) parcel delivery service YTO Express launching a backdoor listing in Shanghai, as it looks for cash to support its operations that are probably losing big money.
Chinese IPOs have gotten off to a slow start this year, both in China and overseas, for a number of reasons. Beijing has banned new domestic offerings for now, in a bid to stabilize markets after a massive sell-off at the beginning of the year. New US listings have also been slow, as many start-ups that previously would have chosen New York now consider listing at home instead. Hong Kong has been the only area with significant new activity, though even there the volatility in China have also depressed the market.
New York or possibly Hong Kong are likely to host the IPO later this year for the China operations of Yum, operator of the KFC and Pizza Hut brands. That plan made big headlines when Yum first announced it in December. (previous post) The idea came after a growing number of shareholders pressured Yum to spin off a unit that carried big profit and growth potential, but also many unique risks associated with China.
Now media are saying that Yum is in talks to sell about 20 percent of the China unit to a group of investors that includes private equity firm KKR (NYSE: KKR), Baring Private Equity and several Chinese funds. (English article; Chinese article) The sale would value the unit at about $10 billion, or just under a third of Yum’s total market value of about $33 billion. That figure is slightly surprising, since Yum’s 6,900 China restaurants account for a about half of its global sales.
The reports say Yum is also seeking a key strategic investor for the China unit, most likely a local company or one with strong local connections that could help its future development. Yum previously said it plans to complete the spin-off by the end of this year, and a spokeswoman indicated that plan remains on track. Shareholders seemed to like the broader picture, bidding up Yum shares by 2 percent in the latest trading session.
Next there’s YTO, which is becoming the latest in a growing string of parcel delivery companies making IPOs as they seek new cash to prop up their operations. Most or all of those listings are coming either through backdoor IPOs in China or regular listings in New York, since China and Hong Kong forbid most new offerings by money-losing companies.
According to the reports, YTO plans to list in Shanghai via a reverse merger with clothing maker Dalian Dayang Trands (Shanghai: 600233). (English article; Chinese article) Under the deal YTO would inject its assets into Shanghai-listed Trands, which would then issue new shares to make YTO its largest stakeholder, in a typical backdoor listing process.
The reports say YTO earned a 717 million ($110 million) profit last year, though I would seriously doubt that since the company operates in an extremely competitive environment. YTO’s move would follow a similar backdoor listing plan in Shenzhen by rival STO Express (previous post), and a reported plan by ZTO Express to raise up to $2 billion in a New York IPO possibly this year. (previous post) I doubt any of these listings will get a very strong reception due to fierce competition that is likely to claim at least one or two major victims before finally easing in the next 3-5 years.
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