Specter of politicized regulators looms over Yum! Brands’ Chinese takeover bid

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Mounting tension between China and the US stemming from disagreements over trade and currency issues could be one of the factors behind the China Ministry of Commerce’s (MOFCOM) decision this week to extend its review of Yum! Brands’ [YUM:US] proposal to take over Little Sheep [968:HK], a source close to the hot pot chain operator told this news service.

If this is indeed the case, it could potentially be a drag on other transactions involving US-domiciled countries that are currently under review by the antitrust regulator, the source suggested.

Tension between the two countries was heightened on 11 October with the passing of the Currency Exchange Rate Oversight Reform Act by the US Senate. The bill was specifically directed at China’s currency, which the US government claimed is undervalued, making Chinese exports to the US too cheap.

On Wednesday, Little Sheep said that it had been informed by MOFCOM of the regulator’s decision to extend its review of the transaction by an additional 60 calendar days, which is very rare. The 60-day extension of the Phase II review commenced on 26 October and is expected to expire on 24 December.

The 9 November long-stop date remains unchanged, but it was suggested that both companies will likely agree to an extension.

However, sources close to MOFCOM downplayed the possibility that political issues were behind its decision to extend the review process. One of the sources explained that its antitrust review procedure relies on quantitative data analysis rather than subjective factors, such as the importance of domestic brands, an issue that would be handled by MOFCOM’s Department of Foreign Investment Administration (DFIA).

MOFCOM, which is an administrative body under the State Council, currently has two roles: it conducts antitrust reviews and assesses national security implications that may arise from transactions. But the two departments within MOFCOM are completely separate, the source said. He likened the Antitrust Bureau to the US Department of Justice’s Antitrust Division, and MOFCOM’s DFIA to the Committee on Foreign Investment in the US (CFIUS). DFIA also reviews all inbound M&A transactions based on China’s foreign investment policy.

Since Little Sheep is incorporated outside of China – it is a Cayman Islands-incorporated company – Yum’s proposed takeover does not need MOFCOM approval under China’s foreign investment policy.

Three mainland-based competition lawyers that are not directly involved in the deal brushed off the possibility of deteriorating Sino-US relations potentially affecting transactions currently being reviewed by MOFCOM.

The more likely reason for the increasing number of reviews lasting several months is due to the fact that MOFCOM currently remains severely understaffed, two of the lawyers pointed out. It is believed that there are less than 40 officials reviewing transactions within MOFCOM’s Antitrust Bureau.

As such, it generally takes around a month for a transaction to be taken up for review by MOFCOM, and on average, around another 10 weeks for the actual review, even for plain vanilla transactions that do not have competition concerns. Transactions involving companies domiciled in Europe and Asia ex-China – not just those involving US-based companies – have also been experiencing months-long MOFCOM reviews.

This news service has previously reported that Yum may require the support of the Inner Mongolia government in order to obtain clearance from MOFCOM. However, the source close to Little Sheep confirmed that it now has the implicit backing of the government.

Spokespeople for Yum and Little Sheep declined to comment for this story.

Other high profile transactions involving US-domiciled companies that need MOFCOM’s antitrust clearance include Joy Global’s [JOYG:US] bid forInternational Mining Machinery Holdings [1683:HK], Google’s [GOOG:US] bid for Motorola Mobility Holdings [MMI:US] and the takeover ofGoodrich [GR:US] by United Technologies [UTX:US].

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