YUM! Now An Acquirer In China, Eating McDonald's Lunch (YUM, MCD)

Restaurant giant Yum! Brands, Inc. (NYSE: YUM) has made a preliminary offer to acquire China’s Little Sheep Group Ltd. and its 300 or so stores in China, the US, and Japan. Yum already owns 27.2% of Little Sheep Group. The preliminary offer for Little Sheep group has no price tag attached, and won’t have until Yum gets all necessary approvals.

Yum owns nearly 38,000 stores in 110 countries, including about 4,000 in China. Yum stores, particularly KFC, dominate the Chinese fast-food space with a 40% market share. McDonald’s Corp. (NYSE: MCD), in contrast, gets about 16% of the country’s fast food business.

Adding a home-grown franchise like Little Sheep’s Hot Pot stores will only build on Yum’s success in China. The company has operated there for 24 years and has hired Chinese managers to run its business and adapted its menus to appeal to Chinese taste.

McDonald’s sells burgers, just like in the good ole USA. Yum’s Pizza Hut stores cater to Chinese tastes for a little more upscale venue, with more than 100 menu items including wine and escargot.

At the same time that Yum is expanding in China, it is trying to sell its 1,630 Long John Silver’s and A&W franchises in the US. In its January announcement of its plans, Yum said that don’t fit into the company’s long-term growth strategy and that it will continue to focus on building brands in China.

Although Yum has gotten some criticism from analysts for putting so many of its eggs in China’s basket, the company isn’t backing away from the Middle Kingdom. And Ronald McDonald can expect to continue getting thumped in China.

Paul Ausick