Yum! Brands Inc. on Thursday appointed the activist investor Keith Meister to its board of directors, prompting further speculation that the Louisville, Ky.-based quick-service restaurant would reorganize its China operations.
Meister is the managing partner at Corvex Management, an activist investor that bought up nearly 5 percent of Yum’s stock and suggested Yum spin off its China operations into a separate company that is a franchisee of the chain’s brands.
Yum made the appointment as it announced it has neared the end of a yearlong strategic review of the company’s structure. In a statement, Meister made it clear the company could take one of a number of actions to improve shareholder value.
“We have had constructive dialogue with the board and management over the last several months,” Meister said. “This is a company with multiple avenues for unlocking significant long-term value, and I look forward to working with the board and management to expeditiously finalize a plan that we believe can deliver that value to shareholders.”
The announcement comes amid continued disappointing sales at Yum’s China division despite predictions from management that business there would turn around by now following a year of brutal sales.
Yum on Thursday also reduced its guidance for earnings in China, saying that same-store sales in China would range from 0 percent to 4 percent in the current quarter, with positive same-store sales at KFC and negative same-store sales at Pizza Hut. Operating profit growth, the company said, is expected to be flat.
China is vital to Yum Brands because the country is home to more than half of the company’s revenues and profits — even though only 6,867 of Yum’s nearly 42,000 locations are in the fast-growing country. Yum operates most of its own restaurants in China, and franchises everywhere else.
Investors in Yum are largely focused on those Chinese operations, and have punished the company’s stock due to the country’s volatility. The stock fell nearly 19 percent in one day last week after Yum announced disappointing quarterly earnings due to that China performance.
Many analysts believe the Meister appointment will lead to a structural change at Yum.
“With the appointment of Meister to Yum’s board of directors, the company has sent a strong signal that the pieces are in motion for a clear change in strategy,” Bernstein Research Analyst Sara Senatore wrote in a note this morning.
Senatore believes the appointment of Meister is a signal the company is listening to many of his recommendations and may adopt them when it completes its strategic review.
That could involve a spin-off of the China business, which would then be a Yum master franchisee. She also said that Yum could take on more debt and buy back shares. “Fundamental weakness in China appears to have finally shifted the boardroom politics in favor of the structural changes needed to catalyze value creation,” Senatore wrote.
Not everybody agrees that a China solution would come in the near term, however. BTIG Analyst Peter Saleh said that Yum could increase shareholder value by borrowing ore money and buying back shares. But, “In our view, the China division will attract a higher multiple once the division regains sales momentum,” he wrote in a note this morning.
And Baird Analyst David Tarantino likewise said that a spin-off of the China business now would not add value to Yum’s current stock potential, given the volatility of the business there and the uncertainty surrounding the company’s performance.
But Mark Kalinowski, analyst with Normura, said that Yum and its three large brands were constructed 20 years ago as a spinoff from PepsiCo Inc. and that it needs to be restructured to adapt to modern times.
“We continue to believe the largest opportunity for the stock is for Yum Brands to be restructured in a way that makes sense for this century,” he wrote, “not the current grouping centered around three large businesses … an arrangement that was essentially the decision of a long-separate beverage and snack foods company made last century.”
Contact Jonathan Maze at [email protected].
Follow him on Twitter at @jonathanmaze
