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Alibaba’s payments unit and Primavera Capital to invest in Yum Brands’ China spin-off

Alibaba Group’s electronic payment unit and a private equity fund plan to make strategic investments in the China business of Yum Brands, which will be spun off as part of the parent’s plan to list the operation on the New York Stock Exchange.

The spin-off and concurrent completion of the US$460 million investments in Yum China by Ant Financial Services Group and Primavera Capital Group are expected to take place on October 31, with Yum China to begin trading in New York on November 1, according to a press statement by Yum Brands, which manages KFC and Pizza Hut outlets around the world.

Fred Hu, the former greater China chairman of Goldman Sachs, and founder of Primavera, will become Yum China’s non-executive chairman after the deal, according to the statement.

Primavera would invest US$410 million in Yum China, while Ant Financial would invest US$50 million, the statement said. Ant’s parent Alibaba also owns the South China Morning Post.

The spin-off will enable Yum China to operate independently from the remainder of Yum Brands’ global business.

“The investments from Primavera and Ant Financial in Yum China mark another important milestone in our plans to separate the China business and create a solid foundation for Yum China as it prepares to become an independent restaurant powerhouse,” said Greg Creed, chief executive of Yum Brands.

Through its investment, Ant Financial will enable its Alipay electronic payment system to be used at Yum China’s KFC and Pizza Hut outlets.

“Through this collaboration, we aim to help Yum China provide world-class mobile payment services for tens of millions of customers across its brands. These services include hassle-free Alipay for customers to help shorten queues at the cashier as well as membership solutions for Yum China designed to help manage their customer relations and promotions,” said Eric Jing, president of Ant Financial.

“Leveraging our Big Data capabilities, KFC and Pizza Hut witnessed promising marketing results through their promotion on multiple Ant Financial platforms. We look forward to further collaborating with Yum China in the future.”

Zhu Danpeng, an associate with the China Branding Research Institute, said the deal came at a good timing as Yum China now needed a lot of money to expand into China’s third- and fourth-tier cities.

“Ant Financial will also get a nationwide platform to run its online payment services for a brick-and-mortar catering chain,” he said.

Zhu sees the deal “make good sense” for Primavera as well, given Yum China’s prospects of a public listing and franchise rights, which could help the private equity firm generate handsome returns in the capital markets.

He reckoned the US$460 million valuation was also “reasonable”.

“Taking into account the fact that there are already more than 7,000 KFC outlets in China, I would consider it a fair price,” he said.

China is one of Yum’s most proliferating markets worldwide, with its KFC restaurant chain enjoying decades of superlative growth. However, the market recently has presented some huge challenges to the Kentucky-based global catering powerhouse.

Heightened competition from domestic players and Chinese consumers’ shift in preferences for healthier and Chinese-style dining options are prompting Yum and McDonald’s to adapt their menus and branch out to lower-tier cities to seek growth.

Goldman is serving as financial adviser on the deal while Wachtell, Lipton, Rosen Katz is serving as legal adviser to Yum Brands and Yum China, according to the statement.

PJT Partners is serving as an independent financial adviser to Yum Brands’ board. Simpson Thacher Bartlett and Fangda Partners are serving as legal advisers to Primavera and Ant Financial.