Stock Spinoffs

China’s Allure Has Both Loeb & Meister Saying $YUM!

YUM! Brands (YUM) has been getting a lot of attention recently and it seems lots of people have ideas on how the company can deliver more shareholder value. Earlier this year, Janney analyst Mark Kalikowsky argued for setting Taco Bell free in a bid to unlock value, given Taco Bell’s purely North American exposure. It hasn’t just been the sell side coming up with ideas as both Dan Loeb’s Third Point and Keith Meister’s Corvex Capital recently unveiled big stakes in the fast food restaurant operator.

Mr. Loeb discussed the position in depth in his Q1 2015 investor letter and basically says (in a gross oversimplification), that it’s a bet on a China comeback. It’s worth reading the whole writeup, but in conclusion, the fund thinks:

…investors should want to own Yum! for its unique open-ended middle-class growth story in China and its strong and growing franchise-led cash flows outside China. We also expect that Yum! management, consistent with their prior public statements, will consider a variety of value-enhancing actions to ensure that the market properly rewards its investors for both compelling earnings streams. Such actions could include more refranchising, more leverage, and perhaps even an alternative ownership structure.

Mr. Meister was also very public about his love for the name, highlighting it during his presentation at the Ira Sohn conference this week. He was also very bullish on its China operations and suggested the country’s operations be spun off into a separate company that would effectively operate as a giant franchisee. Corvex apparently owns over 15 million shares now, making it a Top 5 holder, and YUM is one of the largest positions the fund has ever taken. That is some conviction! The Reformed Broker has a nice writeup summarizing his presentation (and all of the others at the Sohn conference), but in short, Mr. Meister thinks spinning off China could add $16 per share and that the combined companies could ultimately be worth $130-160.

The intense interest from some big names has been a boon for the stock and the name jumped over 6% after the activist stakes were revealed. It seems like management has a number of options available to enhance shareholder value and it should be an interesting name to monitor over the next 12 months. We will keep you updated if management pursues any type of spinoff.

Disclosure: Author holds no position in any stock mentioned.

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