Documents reveal the enormous cost of spinning off Yum’s China Division

KFC Shanghai
A KFC in Shanghai, where Yums’s China Division is based.

Last fall, Yum announced plans to turn the huge China Division into a standalone company, a mammoth undertaking the Louisville fast-food giant plans to complete by Oct. 31 — despite recent reports of stalled talks with two big investors.

Expenses for investment banking, legal, and other spin-related services are enormous, according to Securities and Exchange Commission documents. Yum disclosed initial expenses of $9 million in the annual report last February. They’ve mushroomed ever since, according to the most recent quarterly report:

$10 million

spent in the second quarter alone

$28 million

since the spinoff was announced in October

$58 million

projected total cost by Oct. 31

What’s at stake?
Greg Creed
Creed

Much of Yum’s future. Based in Shanghai, the China Division has 7,200 restaurants, mostly company-owned KFCs and Pizza Huts. Last year, they accounted for 61% of Yum’s $11.1 billion in revenue and 39% of $1.9 billion in profits. Overall, Yum has 43,000 restaurants. (About Yum.)

Yum CEO Greg Creed and the board of directors agreed in October to separate the China business under pressure from activist investors, including Corvex Management Founder Keith Meister, who gained a seat on the board as part of the deal. They think the sum of the parts is greater than the whole.

Yum’s risky China bet

The company has regularly warned investors about its dependence on China. Here’s some of what the company said in the Feb. 16 annual report:

China Shanghai town city blocks of flats high-rise buildings city skyline Huangpu river flow Pudong evening travel traveling
With 24 million residents, Shanghai is China’s biggest city.

“Our overall financial results are heavily dependent on our results in China, and our business is significantly exposed to risks there. These risks include changes in economic conditions (including consumer spending, unemployment levels and wage and commodity inflation), consumer preferences, taxation (including income and non-income based tax rates and laws) and the regulatory environment, as well as increased media scrutiny of our business and industry and increased competition.”

And: “In addition, any significant or prolonged deterioration in U.S.-China relations could adversely affect our China business. Certain risks and uncertainties of doing business in China are solely within the control of the Chinese government, and Chinese law regulates the scope of our foreign investments and business conducted within China.”

Donald Trump
Trump

The report doesn’t specifically call out Republican White House nominee Donald Trump, who’s made anti-China talk a big part of his campaign. But his election could create enormous challenges for any U.S. company with a substantial stake in the country. (Recent Trump-China news developments.)

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