IDCBY Industrial and Commercial Bank of China Ltd (PK)

Yum Brands Inc., the owner of KFC and Pizza Hut, has struck a deal to sell a slice of its China operations to a prominent Chinese deal maker and the financial affiliate of Chinese internet giant Alibaba Group Holding Ltd., according to people familiar with the situation, as it prepares for a spinoff of the China unit.

Primavera Capital, run by former Goldman Sachs Group Inc. Greater China Chairman Fred Hu, and Ant Financial Services Group will buy a combined $460 million stake in the Yum China Holdings Inc. spinoff, according to the people. They will buy the shares at an 8% discount to the average price at which Yum China's shares trade between 31 days and 60 days after they are distributed to Yum shareholders, the people said. The two investors could own between 4% and 6% combined of Yum China, depending on how the shares trade.

The Chinese backing could spark interest in the spun-off company among other investors after it separates from Yum Brands and begins trading separately on the New York Stock Exchange in November. Ant Financial Services runs China's largest online payments service Alipay and has investments in the online food-delivery business. Mr. Hu, a well-respected economist and deal maker, will become Yum China's chairman, according to the people.

Louisville, Ky.-based Yum has had huge success in building Kentucky Fried Chicken into China's most popular fast-food chain since it entered the country in 1987. In recent years, the franchise stumbled as growing competition and food-safety concerns hit sales. The KFC brand in China has returned to positive sales growth over the past year, and Yum China overall generates over a billion dollars of cash flow annually.

The new investors are betting that Yum China's value will continue to grow. As part of the agreement, Primavera and Ant Financial will receive warrants to buy 2% chunks of Yum China shares twice at valuation thresholds of $12 billion and $15 billion, according to people familiar with the matter. Those warrants will have a five-year term and could increase the two investors' ownership to nearly 10% if exercised, they said.

While Yum Brands will no longer own shares in Yum China after the spinoff, the Chinese operation will continue to pay a 3% royalty rate to Yum Brands. The Yum China business will be debt-free after the spinoff and will have the fresh cash from Primavera and Ant Financial to fund growth plans.

The decision to separate the operations came after Yum Brands fell under pressure from activist investors', including Corvex Management LP and Dan Loeb's Third Point LLC, suggesting overhauls. Corvex's Keith Meister, who has pushed hard for the China spinoff, received a seat on Yum's board in October and has been instrumental in negotiations, the people said. Corvex is among Yum Brands' top holders with a 5.4% stake.

Yum's partnership with Ant Financial, China's most valuable internet finance company at $60 billion, could help the fast-food chain navigate China's rapidly changing and highly competitive food-delivery business. More transactions take place over Alipay at Yum China's KFC and Pizza Hut chains than at any other fast-food chain in China.

Chinese e-commerce giant Alibaba, together with its financial affiliate, has carved out a territory in China's competitive online food-delivery and booking-services market. Alibaba and Ant Financial together made a $1.25 billion bet on food-delivery app Ele.me in April. The two also control online food-services platform Koubei, which means "word-of-mouth reputation" in Chinese and has been growing quickly in recent months. Those Alibaba-backed platforms compete with Meituan-Dianping, China's largest online provider of movie-ticketing and restaurant bookings, as well as Chinese search company Baidu Inc.'s Nuomi platform.

Primavera Capital is a China-based private-equity firm founded by Mr. Hu, who led Goldman's $2.9 billion deal to take a 5% stake in Industrial & Commercial Bank of China Ltd. ahead of its huge initial public offering. Mr. Hu has built ties with a range of China's most important financial figures and earned a Ph.D in economics from Harvard University.

Primavera was also an investor in Alibaba before its initial public offering as part of a financing package raised to repurchase half of Yahoo Inc.'s stake in Alibaba. Mr. Hu's role in that deal and close relationship with Alibaba Executive Chairman Jack Ma won Primavera a coveted early investment in Ant Financial last year at a valuation below its latest $60 billion price tag.

Write to David Benoit at david.benoit@wsj.com, Kane Wu at Kane.Wu@wsj.com and Rick Carew at rick.carew@wsj.com

(END) Dow Jones Newswires

September 02, 2016 06:05 ET (10:05 GMT)

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