(YUM) Yum! Cuts Off Two Brands

Yum! Brands Inc. (YUM) has finally found the right candidate for the sale of its brands –– Long John Silver’s and A&W. The company recently inked definitive agreements with two separate buyers led by key franchisee leaders for these divestitures. The deal is expected to close in the fourth quarter of 2011 and have no material impact on its earnings or cash flow.

Long John Silver’s will be acquired by LJS Partners LLC, led by a consortium of prominent franchisee leaders and other investors while A&W will be acquired by A Great American Brand LLC, led by a franchisee leader with substantial interests in A&W restaurants.

In January, Yum! Brands announced its intent to sell these brands so that it can focus on expanding the remaining three brands KFC, Pizza Hut and Taco Bell in the U.S, China and other international markets. Goldman, Sachs & Co. was the financial advisor for the divestiture process.

Louisville, Kentucky based Yum! Brands had shaped up in 1998 after spinning off from PepsiCo Inc. (PEP). In 2002, Yum! Brands acquired Long John Silver’s and A&W for $320 million. These two chains account for 1,630 of the company’s 37,000 plus restaurants worldwide. All the restaurants under the two brands are owned and operated by franchisees and are mostly located in the U.S.

We believe, despite a handsome portfolio of restaurants, the two chains failed to perform during the U.S. economic downturn largely due to its lack of international exposure. On the other hand, Yum! Brands’ long-term growth thrives on international expansion as well as positioning of its matured and popular brands in the U.S. According to management, Long John Silver’s and A&W were not going well with the long-term growth proposition of Yum! Brands.

Yum! is not the only fast food chain looking to vend slower growth brands. The Wendy’s Co. (WEN) also sold off its sister brand Arby’s in June this year. Yum! Brands currently retains a Zacks #3 Rank (short-term Hold rating). We are also maintaining our long-term Neutral recommendation on the stock.

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