Yum Brands Will Split Off China Business

Yum is targeting 95% franchisee-owned and operated stores by the end of 2017. The company currently claims a base of more than 41,000 stores and plans to open 2,000 more in 2016. The company is giving something up too:

Yum! Brands is committed to returning substantial capital to shareholders in conjunction with the separation. This will occur as the Company transitions to a non-investment grade credit rating with a balance sheet more consistent with highly leveraged peer restaurant franchise companies. Moreover, this will allow for an ongoing return of capital framework that will seek to optimize the Company’s long-term growth rate on a per-share basis.

The separation follows a push for Yum’s reorganization by activist investment firm Corvex Management, which owns almost 5% of the company. Corvex’s Keith Meister was appointed to Yum’s board of directors last week.

Yum’s China business has never fully recovered from a tainted food scandal in late 2012 and successive issues related to the Chinese operations. Apparently letting the China business sort itself out while putting the rest of the company on a high-growth path isolates the problems and is expected to give Yum a lift.

That is certainly the way investors are looking at Tuesday. Shares traded up more than 3% at an intra-day high of $75.22 after closing at $71.71 on Monday. The stock’s 52-week range is $66.35 to $95.90, and the consensus price target is $81.47.

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