Yum! Brands, Inc., the owner of KFC, Pizza Hut and Taco Bell, has unveiled plans to spin off its China business into a separate, publicly traded company.

LOUISVILLE, KY. — Yum! Brands, Inc., the owner of KFC, Pizza Hut and Taco Bell, has unveiled plans to spin off its China business into a separate, publicly traded company. According to Yum!, the spin-off will create two “powerful, best-in-class companies, each with a  separate strategic focus.” The decision to create two independent companies follows a review of strategic options conducted over the past year by Yum! Brands’ board of directors and management team, with the assistance of independent financial and legal advisers.

After the spin-off, Yum! China will become a franchisee of Yum! Brands in mainland China. The Shanghai-based business will have exclusive rights to three brands — KFC, Pizza Hut and Taco Bell — and is expected to provide an attractive investment profile and significant opportunity for growth. The company is expected to have no significant debt, with substantial financial capacity to invest in its business.

Yum! Brands said Yum! China has the potential to expand from 6,900 restaurants currently to more than 20,000 restaurants in the future. The business also has significant sales and profit growth potential in its existing restaurants, which the company plans to capture over time by growing its core offerings and expanding further into new initiatives such as home delivery. Yum! China will be led by Micky Pant, who was named its chief executive officer in August.

Meanwhile, Yum! Brands will continue to focus on expanding the presence and performance of KFC, Pizza Hut and Taco Bell around the world. Yum! Brands said it will have an “extremely attractive business model,” with stable earnings, high profit margins, low capital intensity, and strong cash flow conversion. In addition, Yum! Brands said it plans to become more of a “pure play” franchisor over time and is targeting having at least 95% of its restaurants owned and operated by franchisees by the end of 2017. It currently has a global base of more than 41,000 restaurants, with approximately 2,000 new units being opened each year. Yum! Brands will continue to be led by c.e.o. Greg Creed.

Yum! Brands plans to continue to focus on expanding the presence and performance of KFC, Pizza Hut and Taco Bell around the world.

One of the key goals of the spin-off is to return substantial capital to shareholders. This is expected to occur as the company transitions to a non-investment grade credit rating with a balance sheet more consistent with highly leveraged peer restaurant franchise companies. Moreover, this will allow for an ongoing return of capital framework that will seek to optimize the company’s long-term growth rate on a per-share basis.

Yum! Brands does not expect to have incremental ongoing operating costs associated with operating as two separate, publicly-traded companies.

The transaction is expected to be completed by the end of 2016 and is intended to qualify as a tax-free reorganization for U.S. federal income tax purposes, with the legal structure and form to be announced at a later date.

Greg Creed, c.e.o. of Yum! Brands

“Over the past year, our management and board have thoroughly evaluated a range of value-creating opportunities that capitalize on our considerable strengths,” Mr. Creed said. “Following the separation, each standalone company will be able to intensify focus on its distinct commercial priorities, allocate its own resources to meet the needs of its business, and pursue distinct capital structures and capital allocation strategies. This will provide a clear investment thesis and visibility to attract a long-term investor base suited to each business.”

Mr. Creed continued, “Yum! Brands will have a more stable earnings stream typical of a franchise company powered by industry-leading brands, while also benefiting from the development of the China business as a unique growth engine. In turn, our China business is self-sufficient and scalable with strong leadership in place, and is well-positioned to realize its full potential as a standalone business to capture the compelling opportunities in China.”

David Novak, executive chairman, added that Yum! Brands has spent the past several years building its global structure outside of China based on a franchise model that generates stable earnings, high profit margins, low capital investment and strong cash flow conversion. At the same time, its China business, which has been predominantly equity-owned, has been able to generate substantial operating cash flow annually, and has the ability to invest in its own growth.

“After a thorough analysis and due diligence, I’m pleased the board concluded that a separation transaction provides the right corporate structure for our business going forward and unlocks significant value for our shareholders,” Mr. Novak said. “This transaction will create two best-in-class independent companies. Our commitment to a future capital structure that provides strong financial support for our business strategies and meaningful cash returns to shareholders underscores our ongoing focus on value creation and our confidence in our long-term growth prospects.”

Effective January 2016, Yum! Brands said its India business will integrate its three major restaurant brands into the global KFC, Pizza Hut and Taco Bell divisions of Yum! Brands, as the company moves to organizational alignment by brand, rather than by geographic location.