Added today to existing position.
Colonel Sanders Devouring Little Sheep Means 69% Gain: Real M&A
Oct. 31 (Bloomberg) -- Anti-monopoly regulators are turning Yum! Brands Inc.’s acquisition of a chain of Mongolian hot-pot restaurants into the most profitable bet in China.
Little Sheep Group Ltd. has tumbled after saying last week that China’s Ministry of Commerce extended a review of Yum’s HK$4.4 billion ($573 million) takeover by two months.
Little Sheep, which rose to within 25 cents of Louisville, Kentucky- based Yum’s HK$6.50-a-share bid, has now fallen 18 percent below that price, according to data compiled by Bloomberg.
While Little Sheep would extend Yum’s lead among restaurant chains in China, independently owned eateries would still control more than 90 percent of sales.
That means the Ministry of Commerce, which has blocked only one of the more than 250 takeovers , it has reviewed since China’s anti-monopoly law began three years ago, is unlikely to reject Yum’s bid, DBS Vickers Hong Kong Ltd. said.
Wong expects the deal to close by March, which implies an annualized 69 percent return based on last week’s closing price of HK$5.30, data compiled by Bloomberg show.
Founded in 1999, Little Sheep has more than 400 Mongolian hot-pot restaurants, where diners cook a variety of thinly sliced meats such as pork, mutton and beef in a simmering broth.
Little Sheep has posted annual sales growth of more than 20 percent since 2006 and analysts project the company will extend that streak through at least 2013, according to data compiled by Bloomberg.
While investors dumped shares of Little Sheep because of the possibility the deal will be blocked by antitrust regulators, the concern is unwarranted because China is dominated by independently owned eateries, said Titus Wu, a Hong Kong-based analyst at DBS Vickers.
The ministry has reviewed 267 mergers under the anti- monopoly law and rejected only one -- Coca-Cola Co.’s $2.3 billion bid for China Huiyuan Juice Group Ltd. in 2009, said Marc Waha, Hong Kong-based partner at law firm Norton Rose LLP.
The deal would have combined China’s largest and third- largest juicemakers and given Coca-Cola a 17.5 percent share of the market that year, according to Euromonitor International.
In China’s restaurant industry, independent operators garnered 92 percent of sales last year, while restaurant chains including Yum controlled just 8 percent, Euromonitor said.
Yum, which opened its first KFC outlet in China in 1987 and has more than 3,300 fried chicken outlets across the country, still accounted for less than a fifth of the sales within the smaller chain market. Little Sheep had a 2.1 percent share.
“This case is more likely to be approved because it’s hard to standardize Chinese food,†said Mei Xinyu, a researcher at the Ministry of Commerce’s Chinese Academy of International Trade and Economic Cooperation. “There are many local restaurants which have the capability to compete.â€
“The market may have overreacted,†said Christina Lie, an analyst at First Shanghai Securities in Hong Kong.
http://www.businessweek.com/news/2011-1 ... l-m-a.html