Bottom line: Yum may sell control of its China unit to Chinese partners in a bid to become more local, while ZTE’s plans for a Nubia IPO reflect a growing emphasis on its younger, trendier smartphone brand.
A couple of big IPO stories are rippling through the headlines, led by word that an investor group headed by China’s sovereign wealth fund could buy control of the China unit of Yum Brands (NYSE: YUM), owner of the KFC fast-food chain, as it gets set for a spin-off and separate listing. This particular news marks a shift from previous reports that implied Yum would retain control of its China unit, even as it sold a major stake to big institutional investors.
While the Yum listing is likely to come later this year, another smaller but interesting deal has telecoms giant ZTE (HKEx: 763; Shenzhen: 00063) saying it plans to spin off and separately list its smartphone division that manufactures under the Nubia brand in the next 3 years. That hints that ZTE may be re-thinking its smartphone business, and perhaps preparing to slowly de-emphasize its older ZTE-branded phones in favor of its younger, higher-end Nubia line.
Let’s begin with Yum, which last year announced plans to spin off its massive China operations after coming under pressure from investors to separately run and list the unit. Following that announcement, reports emerged last month that Yum was in talks to sell up to 20 percent of the unit to cornerstone investors before the IPO, which was likely to occur in either New York or Hong Kong. (previous post) Those reports named global private equity giants KKR and Baring as 2 interested parties, though they also said several Chinese funds had expressed interest.
Now the latest report from Bloomberg is saying that China Investment Corp, the nation’s sovereign wealth fund, is leading a group that has expressed an interest in buying a much larger majority stake in Yum China. (English article) The report says that KKR and Baring would be part of the buyer group, and for the first time gives a valuation of the unit at around $8 billion.
The biggest new development is the significantly larger stake that CIC and its partners would get in this deal. Most observers had previously assumed that Yum would maintain a majority stake in the China unit, and then sell the rest to cornerstone and IPO investors. Thus this latest move looks like Yum may have changed its mind and be willing to let its China division become a Chinese-owned company, while maintaining a minority stake.
New Approaches to China
This kind of approach looks slightly similar to one being followed by fast-food rival McDonald’s (NYSE: MCD), which last week was reported to be in talks to sell its China-based store unit to China Resources. (previous post) Such a move would be more consistent with McDonald’s global approach of letting local franchisees run most of its stores, allowing it to focus on brand and product development, as well as marketing.
Next let’s look quickly at ZTE, whose smartphone business has struggled to find an audience due to stiff competition both globally and especially in its fiercely contested home market. Within that business, the company’s separate and newer Nubia brand has posted some encouraging results, carving out a niche as a higher-end, trendier name compared with its older and stodgier ZTE line of smartphones.
The latest reports don’t contain much new information besides the IPO plan for Nubia and 3 year time frame. (Chinese article) They point out that Nubia got a major strategic partner earlier this year in a tie-up with local electronics retailing giant Suning (Shenzhen: 002024), which bought a third of the unit for 1.93 billion yuan ($300 million).
A Nubia IPO would look similar to ZTE’s recent spin-off of another unit into a China-listed company, as it tries to bounce back from a major restructuring a couple of years ago. But this latest move also seems to hint that ZTE will place growing emphasis on Nubia in the years ahead, even though the unit only accounts for about one-sixth of its smartphone sales now.
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