Yum Brands Inc. (NYSE: YUM) will split off its China business after being pressured from an activist shareholder. The company’s China business has been plagued by meat scandals and marketing failures.
Yum Brands’ shares increased 4.6% in early morning training.
Yum China will become a franchisee of Yum Brands in China and will operate as a publicly traded company. The company will pay Yum Brands the percentage of sales in exchange for civil rights to three of the company’s brands: Pizza Hut, KFC, and Taco Bell.
Splitting off the China business will allow Yum Brands to stay focused on reinvigorating its stagnant business in the US and expand in emerging markets, like India. Shareholders will also get a steady stream of income from the royalties, and Yum Brands can remove lease obligations from its balance sheet.
The split off came after activist investor Keith Meister pressured Yum Brands. Meister’s hedge fund, Corvex Management, currently holds a 5% stake in the company, and has been pushing for reorganization for a number of months. Meister was appointed to the company’s board last week.
Yum Brands first entered China through its KFC brand in 1987, it was one of the first US fast food chains to set up operations in the country.
For many years, the China business lead in driving sales for the company. Sales have faltered the past several quarters as the company has been plagued by multiple problems ranging from marketing failures to meat scandals. China’s slowing economy has also been a problem.
The separation is expected to be complete by the end of 2016, and will be tax-free to shareholders.