YUM! Brands plans to increase debt for share repurchase program; will use bonds for partial funding

By Jennifer Lanning Drey

Portland, Ore., Oct. 9 - YUM! Brands Inc. will use a combination of free cash flow, additional debt and refinancing proceeds to fund its "most ambitious share repurchase program yet," YUM! chief financial officer Richard Carucci said Tuesday during the company's third-quarter earnings call.

"We have studied this at length and believe we have a structure that is very supportive of our global business for the foreseeable future, yet provides a degree of comfort and what we like to call 'sleep-at-night durability.'

"At the same time, it does task our balance sheet to contribute to the overall YUM! enterprise with a more efficient capital structure while meeting our investment grade target," Carucci said.

YUM! expects to remain rated as an investment-grade company even after taking on additional debt, due to its consistent growth, high returns and strong free cash flow, YUM! chief executive officer David Novak said during the call.

YUM! projects that it will generate a record $1.4 billion in cash from operating activities in 2007.

Bond issue plans

During the question-and-answer session of the call, YUM! treasurer Tim Jerzyk told an analyst that the company plans to increase debt to partially fund the repurchase program by entering the bond market but has not announced timing or specific plans.

The YUM! share repurchase program that was announced Monday authorized the company to repurchase up to an additional $1.25 billion of its outstanding stock over a 12-month period. The authorization is part of the company's overall plan to buy back a total of $4 billion of the company's outstanding common stock over the next two years.

When discussing the buybacks, Jerzyk did not provide a number for how much incremental debt the company may take on, but he did say that YUM! believes it can take its adjusted debt-to-EBITDA level as high as 3.0, based on the strength of the company.

YUM!'s long-term business model includes 20% operating profit growth from the company's China division, 10% operating growth from its international division and 5% operating growth from its U.S. business.

In 2007, the China and international segments are expected to exceed their targets while the U.S. business is expected to be even with last year.

"We expect 2007 will be considered as another year of consistent financial performance, another year of impressive global growth and another year with strong global cash flow returned to shareholders," Carucci said.

YUM! Brands is a Louisville, Ky.-based restaurant company with brands including KFC, Pizza Hut, Taco Bell and Long John Silver's.

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