China's Little Sheep devoured by Yum!

By Wang Ying (China Daily)
Updated: 2011-05-14 09:17
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China's Little Sheep devoured by Yum!

A Little Sheep hot pot restaurant in Beijing. The chain has nearly 500 outlets throughout China, East Asia and North America. [Photo / China Daily]

SHANGHAI - Yum! Brands Inc is set to acquire the Hong Kong-listed Mongolian hot pot brand Little Sheep Group Ltd at a 30 percent premium price of HK$6.5 (84 cents) a share.

Little Sheep will delist once the deal wins final approval from the Ministry of Commerce, according to a joint announcement by the companies on Friday.

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The offer from Yum, the owner of several fast-food chains including KFC and Pizza Hut, is 30 percent higher than the hot pot group's closing price of HK$5 on April 21, the last trading day before a filing to the Hong Kong stock exchange.

Yum's holding in Little Sheep will increase from 27.17 percent to 93.22 percent. The remaining 6.78 percent will be held by the founder and current chairman of Little Sheep, Zhang Gang, and a non-executive member of the board, Chen Hongkai.

Although Zhang once claimed Little Sheep would grow into China's version of Yum, the change of management at the 12-year-old brand comes as little surprise.

"Since founding Little Sheep in 1999, we have managed the brand with an open attitude and a global vision. I believe Yum's expertise and experience in chain-restaurant operation and brand management will benefit Little Sheep in the development of both the domestic and overseas markets," said Zhang in the statement.

Analysts said various factors have led to the privatization of Little Sheep.

"This is a good deal for both parties," said Liu Shengjun, vice-director of Lujiazui International Finance Research Center, which is affiliated to China Europe International Business School.

"Little Sheep encountered a bottleneck during its rapid expansion. Although it swept up Chinese diners during its first years and listed in Hong Kong, the typical problems affecting traditional Chinese food outlets have occurred at Little Sheep too," Liu told China Daily.

According to Liu, a lack of standardized cuisine and poor innovation has caused a drop in the number of frequent visitors. "Many food brands, both domestic and overseas, are adapting and innovating to retain their consumers, and the competition in China's fast food market is growing fiercer."

Currently, Little Sheep has nearly 500 outlets throughout China, East Asia and North America. However, its rapid expansion was hit by the under-development of cold chain technology. Logistical problems have also affected its performance in some areas. In addition, the rising cost of raw materials, labor and rent are looming threats to the company's financial performance, analysts said.

"After the deal, Yum's strong logistics network across the nation will lower the operating costs of Little Sheep, and will create a win-win outcome," Liu said.

According to the announcement, Zhang will maintain his position after Little Sheep's privatization. "I will hold Little Sheep's shares in the long term, and stay in my management position. I am confident about the China market," he said.

For Yum, this is another milestone since it entered China in 1987. Operating more than 3,800 restaurants in more than 700 cities nationwide, the fast-food giant has a large appetite for the Chinese market.

"Chinese food is very localized, and for many years Western fast-food brands were not interested in offering real Chinese food. But the successful localization of KFC inspired them to invest more," Liu said.