Yum Brands, the American multinational fast food corporation behind brands like KFC and Taco Bell, has announced that it is selling Pizza Hut for a total of $2.7 billion. This sale will be to a private equity firm called LongRange Capital and to Yum China: a Chinese fast food corporation that split off from Yum Brands in 2016.

This sale follows years of Pizza Hut underperforming relative to the other brands under the Yum Brands umbrella. Pizza Hut only accounted for 10% of the company’s operating profits, and excluding Pizza Hut the company’s operating profits grew by 10% last year (whilst Pizza Hut has been declining consistently in the same period).

Analysis

This deal is a typical example of portfolio rationalisation, which is a practice that conglomerates (large companies made up of distinct businesses) commonly carry out in order to allocate greater focus to profit-generating businesses. This sale not only allows Yum Brands to reallocate capital/resources towards growing KFC and Taco Bell, but also allows Yum Brands to take some value from Pizza Hut right now rather than allowing the brand’s value to further deteriorate.

The PE firm behind the part-acquisition of Pizza Hut, LongRange Capital, has a portfolio that spans gyms, funeral services and diamond manufacturing. This calls into question whether a turnaround of Pizza Hut is possible when even Yum Brands with its sector expertise struggled to make this happen.

What does this mean for fast food?

• This deal sits within a wider trend of consolidation in the food and beverage sector, with other large transactions involving companies like Kellogg and Unilever as of late

• PE appetite for consumer brands like Pizza Hut appears to remain strong despite the underlying performance of these target businesses being weak, suggesting that investors believe operational turnarounds are possible

• Yum China choosing to acquire the Chinese arm of Pizza Hut implies that a poorly performing brand may retain its strength in certain jurisdictions