KFC ... Nov10

KFC Holdings Bhd’s (KFCH) top official has brushed off talk that the firm is a target

of takeover by a substantial shareholder.

QSR owns a direct 28.8% stake in KFCH. Kulim Malaysia Bhd owns 55% of QSR. Kulim is a subsidiary of Johor Corp, which has a 52.4% stake in the diversified group.

Meanwhile rumours about KFCH being a “potential privatisation” target would continue to support its share price.

With KFC going big in India, expecting to absorb a lot of KFC’s financial resources over the next few years. This has forced Jcorp and QSR, to think of its position in the companies in the long term.

Moving forward, the expansion in India will take up much resources, which means KFC may not be able to give out attractive dividends The other option if for Jcorp to sell the company to the highest bidder.

Jcorp’s investments in KFC via QSR amounts to some RM300 million. A sale should easily net the company proceeds of more than Rm1 billion, which would come in handy for Jcorp which has some Rm3 billion in debt obligations to meet in 2012.

There is no shortage of suitors for KFC. There are offers from government linked organizations, businessmen, private equity funds and even the royals.

Sources say at least one royal has expressed interest in KFC but whose proposal is meeting resistance. A Singapore based private equity firm and a local counterpart, believed to be Ekuiti Nasional Bhd, were believed to be looking at KFC and QSR. However, the offer was said to be a tad too.

An improved offer has not landed on the table. It is believed to be from parties linked to Tan Sri Halim Saad. But the current share prices (Nov 2010) of KFC and QSR are seen as a stumbling block.

The interested parties aligned to Halim in KFC would be less controversial than Asas Serbas’s bid for PLUS. This is because KFC is not regulated by the government and is entirely commercially driven.

Apart from it not being regulated by the government, there is another compelling reason why KFC is an attractive stock. It generates healthy cash flow through its chain of restaurants.

The question is, will its existing operating cash flow be sufficient to finance a buyout of the business? An industry says the deal will not attract suitors as the cash flow from KFC and QSR cannot finance it and current valuations are too high.

Any change in shareholding in KFC will have to come with descent pricing – and a gentle nudge from the Johor government. This effectively means that apart from financial strength, political ties will play a key role in changes at KFC.