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    MARKET EDGES

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It’s been our long held belief that the Board of Yum! Brands (YUM) has needed to “de-risk” the company from its large China operations.  It now looks like that change is inevitable.  At least there are few large shareholders that hope so!

Yesterday, after the close YUM announced that Corvex’s Keith Meister has joined YUM’s Board of Directors.  This move alone signals a shift in the company’s thinking, which was inevitable following the plunge in YUM’s stock following the company’s recent earnings announcement.  Also, after the close, the company updated its 4Q15 guidance, which contained more bad news.  Fortunately, the updated guidance will take a back seat to the conclusions emerging from the board’s “year-long strategic review.”   YUM said it will announce its decision about a prospective restructuring “shortly”.

Reading between the tea leaves it now appears most likely that YUM will announce plans of a material restructuring on or before its December 10th Analyst Meeting.   

The two most likely events are:

  1. A decision on the new operating structure of the China Division with a possible spin-off (to trade on the Hong Kong exchange)
  2. A material leverage recapitalization

Other possible events include:

  1. A sale/IPO of Pizza Hut
  2. A split of the company into three companies (KFC, PH and TB)

The most important event will be to limit the company’s exposure to the volatility in the China business and return the company to being a high margin high return asset-light global franchise business model.  Currently, YUM is trading at 11.7x NTM EV/EBITDA versus 15.6x for its global asset light peer group and 12.5x for McDonald’s.

We can still value YUM close to $100, but the multiple assumptions behind that can be called into question give the current macro environment in China.  That being said we can still see this stock getting back to $90.

We look forward to hearing what the YUM Board of Directors has to tell shareholders.

Please call or e-mail with any questions.

Howard Penney

Managing Director

Shayne Laidlaw

Analyst