Some 7 months after Yum Brands (NYSE: YUM) first announced its bid to buy leading hot pot chain Little Sheep (HKEx: 968), China’s anti-monopoly regulator has finally approved the deal, in a major breakthrough not only for Yum and Little Sheep but also for China. (company announcement) This deal looked smart for both Yum and Little Sheep from the start, but investors had worried that the Commerce Ministry would use the anti-monopoly excuse to veto it over concerns that were more nationalistic in nature. Such a veto, which had led Little Sheep’s Hong Kong-listed shares to trade well below Yum’s offer price, would have sent a chill through the market, demonstrating that China was unwilling to let its best-known brands be purchased by foreign buyers following the Commerce Ministry’s 2009 veto of Coke’s (NYSE: KU) purchase of Huiyuan (HKEx: 1886), China’s leading juice brand. Interestingly, Huiyuan’s shares shot up 16 percent as well after approval of the Yum-Little Sheep deal, as investors bet that perhaps Huiyuan itself could become a takeover target again under the Commerce Ministry’s new enlightened approach, perhaps by Coke rival Pepsi (NYSE: PEP), which announced a major overhaul of its own China strategy earlier this week. (previous post) Following the Little Sheep decision, I would expect to see strong gains in shares of not only Huiyuan but also other up-and-coming Chinese brands in the weeks ahead, as investors bet that they could also now become takeover targets. Likewise, we could also see gains in shares of mid-sized Western consumer brands, as Western governments will now also be under pressure to approve such deals to show their own commitment to fair trade. As to Yum and Little Sheep, I would look for rapid expansion for the Chinese hot pot chain both at home and perhaps even abroad towards the end of next year, after Yum, China’s largest fast-food operator through its KFC brand, has a chance to learn more about the company and formulate a plan to leverage its strong name and popular hotpot format.
Bottom line: China’s approval of Yum’s purchase of Little Sheep will open the door to more buying of well-known consumer brands by both Western and Chinese firms in each other’s markets
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