The spinoff would see YUM’s sizable China operations spun off into a standalone company that would pay royalties (~3%) to the parent. While the timing still remains unknown, the key value driver in this transaction is really financial engineering as it is expected that YUM would have a dramatically different balance sheet post-spin. Dramatically more debt, to be more specific, a stark contrast to its current, more conservative investment grade balance sheet. For an idea on the leverage front, JPM valued the name assuming 5x leverage on the ex-China/India YUM, along with 20+x EPS multiples.
The stock popped on the upgrade, much like it did after the activist investors unveiled their stakes. JPM slapped a price target of $108 on the name so there is still some upside, but it is starting to feel like a spinoff is already getting baked into the price. Although still unknown, that means the ‘when’ question could be more important than it seems.
Disclosure: Author holds no stake in any company mentioned