Yum to sell stake in China business ahead of spinoff

September 2, 2016 6:17 AM EDT

A KFC fast food restaurant, which is owned by Yum Brands Inc, is pictured ahead of their company results in Pasadena, California, U.S., July 11, 2016. REUTERS/Mario Anzuoni

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By Michael Flaherty

(Reuters) - KFC and Pizza Hut owner Yum Brands Inc (NYSE: YUM) said Chinese investment firm Primavera Capital and an affiliate of Alibaba Group Holding Ltd (NYSE: BABA) will buy a stake in Yum China for $460 million as Yum prepares to spin off the business.

The deal gives Primavera, a powerful China-focused private equity firm founded by an ex-Goldman Sachs banker, a significant stake in Yum's China business. It also further expands the reach of Ant Financial, which runs Alibaba's Alipay mobile payments platform and has been expanding into China's restaurant industry.

The investors will receive warrants to buy an additional 4 percent stake in Yum China in two tranches at valuations of $12 billion and $15 billion, the company said on Friday.

A Yum spokesman said the use of the proceeds from the deal will be determined by the future Yum China board of directors.

Yum has signaled that part of the money could go toward expanding across China, as the company signaled last October that it hoped to nearly triple the amount of its restaurants in China to 20,000.

KFC and Pizza Hut brands reaped the rewards of catering to China's booming economy, with patrons flooding the restaurants that offered fast Western food, a higher level of service and perceived food safety.

But Yum's China business has hit road blocks in recent years, including a scandal at a minor meat supplier and bird flu outbreaks.

Yum, still the largest fast-food chain in China, has also been losing ground to McDonald's Corp (NYSE: MCD).

The Louisville, Kentucky-based company's move to separate its China business followed pressure last year from one of its largest investors, Corvex Management, the activist hedge fund run by Keith Meister. Meister is on Yum's board.

The spinoff is expected on Oct. 31, with Yum China to begin trading on the New York Stock Exchange a day later, the company said on Friday.

Primavera will invest $410 million, while Ant Financial, which runs Alibaba's Alipay mobile payments platform, will put in $50 million. China's sovereign wealth fund and New York private equity firm KKR & Co were also in the hunt for a Yum China stake.

Primavera's founder, Fred Hu, will become non-executive chairman of Yum China's board.

Goldman Sachs is financial adviser, while Wachtell, Lipton, Rosen & Katz are legal adviser to Yum Brands and Yum China. Simpson Thacher & Bartlett LLP and Fangda Partners are legal advisers to Primavera and Ant.

Yum shares were up 1 percent at $91.70 in morning trading.

(Additional reporting by Anya George Tharakan and Sruthi Ramakrishnan in Bengaluru; Editing by Saumyadeb Chakrabarty and Nick Zieminski)

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