KFC owner Yum Brands to split off China business

Yum Brands, the owner of KFC, Pizza Hut and Taco Bell, announced Tuesday it is splitting off its $6.9 billion China business into a separate company.

The spinoff will be named Yum China, and focus on the US company's huge but struggling restaurant business in the country.

The rest of the global business, which currently counts 41,000 restaurants in more than 125 countries, will remain with the existing Yum, which will evolve into a "pure play" franchisor, with nearly all of its restaurants licensed to franchise holders.

"Following the separation, each standalone company will be able to intensify focus on its distinct commercial priorities, allocate its own resources to meet the needs of its business, and pursue distinct capital structures and capital allocation strategies," said Yum chief executive Greg Creed in a statement.

"This will provide a clear investment thesis and visibility to attract a long-term investor base suited to each business."

The move came after Yum's 6,900 KFC and Pizza Hut restaurants in China have struggled for two years with slowing economic growth, challenging consumer tastes and a health scare after a nearly three-decade buildup.

The company was hammered by a tainted meat scandal in China in mid-2014, which hit the bottom line of the entire company.

Global revenues grew just one percent last year to $13.28 billion, and net income fell four percent to $1.05 billion.

But revenue in the third quarter, ended September, was up two percent from a year earlier to $3.4 billion, and net income rose 4 percent to $421 million.

Yum said the China spinoff will operate as a country franchise of Yum Brands, which "will therefore continue to benefit from China's growth," the company said.

Under a mainly Chinese management team led by CEO Mickey Pant, Yum China has "a compelling growth profile in one of the world's fastest-growing restaurant markets," it added.

The new unit will have strong cash flow, little debt, and a strong market position. KFC, or Kentucky Fried Chicken, is the top foreign restaurant brand in China, with 4,900 outlets in more than 1,000 cities.

The group also has some 1,400 Pizza Hut Casual Dining restaurants, and 300 Pizza Hut Home Service pizza delivery shops.

The new company expects to open a total of 700 new restaurants this year and, long term, targets having more than 20,000 across China.

The China business has also been hit by the poor performance of a chain of Mongolian-style hot-pot restaurants it took over in 2012, Little Sheep.

In the fourth quarter of last year Yum wrote off $361 million on Little Sheep losses.

As for Yum Brands, the company said it will ratchet up debt to mirror the financial stance of rivals and plans to return "substantial capital to shareholders in conjunction with the separation."

Yum Brands meanwhile will realign management by restaurant brand rather the geographic region.

Yum shares jumped 4.1 percent to $74.67 in opening market trade after the announcement.