Some purists swear that seafood and pizza should never be mixed. But not Yum China, the US-listed company that manages the KFC and Pizza Hut restaurants in the world’s second-biggest economy. Its menu innovations have perplexed customers, creating scope for an opportunistic bid. Hillhouse Capital, the Asia-focused investment group, is reportedly in talks with Yum.
Hillhouse had $ 30bn under management as of a year ago. Zhang Lei, its founder, made his name as an early investor in Tencent, the social media and gaming company, and JD.com, the ecommerce group. As China’s tech funds mature, they are increasingly trying to disrupt offline retail businesses. If reports of an interest in Yum turn out to be true, Hillhouse’s deliberations are an extension of this trend.
Yum China’s US-listed shares have risen 12 per cent since rumours surfaced last week. That still leaves them near their lowest levels in more than a year. A recent sell-off was triggered by disclosures that Pizza Hut’s most recent quarterly same-store sales fell 5 per cent compared with a year earlier. The chain did not quite satisfy consumer tastes with localised varieties, such as pizza featuring abalone, the meat of a large mollusc.
Revenue growth has languished at less than 1 per cent annually in the past four years. A mere tech revamp is unlikely to deliver a significant boost. First, Yum’s digital efforts are already robust. Worse, competition is heating up. The average number of rival restaurants within a short drive of Yum’s KFC locations has been increasing, according to analysts at UBS. Private equity buyers, including Carlyle, bought control of McDonald’s China last year.
Yum China’s enterprise value accordingly equates to less than 10 times ebitda, a significant discount to global peers. As the largest fast-food group in China, Yum has advantages in fending off rivals. Hillhouse would need to offer a decent premium to prise this limpet from its rock.
If you are a subscriber and would like to receive alerts when Lex articles are published, just click the button “Add to myFT”, which appears at the top of this page above the headline.
Get alerts on Mergers & Acquisitions when a new story is published