Yum Restaurants India Pvt. Ltd, the local arm of American fast-food firm Yum Brands Inc., has concluded a year-and-a-half-long exercise to reorganise its business under larger, well-capitalised franchisees.
In this regard, more than 300 outlets, operated by several of its franchisees, have been sold to a newly formed entity—Sapphire Foods India Pvt. Ltd.
The new entity is owned by a consortium of four private equity funds, led by Samara Capital.
Together, the four funds have pumped in close to Rs.750 crore in the entity to acquire six to seven franchisees, including those held by Mumbai-based Dodsal Hospitality Pvt. Ltd, making Sapphire one of the largest owners of Pizza Hut franchisees in India.
Mint could not independently verify the name of the fourth investor.
The move now splits Yum Brands’s India business, managing over 800 restaurants across KFC and Pizza Hut brands, into three units: Gurgaon-based Ravi Jaipuria-owned R.J. Corp. with close to 300 restaurants, about 100-150 restaurants directly with Yum Restaurants and over 300 with the new entity, Sapphire Foods.
“This is a landmark deal, the first of its kind in the category, that sets up our brands extremely well to leverage the huge opportunity that India has to offer and, in the process, create significant value for all stakeholders,” said Ankush Tuli, chief financial officer at Yum Restaurants.
According to Tuli, the firm, which plans to more than double the number of restaurants it operates in India to almost 2,000 in the next five to seven years, realized that business will not grow on the back of multiple smaller franchisees.
In an email response, Ajay Relan, founder and managing partner at PE firm CX Partners, said there is significant potential to continue to grow the brands across India and Sri Lanka. “Sapphire India is now among the largest franchisees of Yum Brands in India, a scale which offers potential in terms of harmonizing operations and planning growth better,” said Relan, adding that both Pizza Hut and KFC are strong, scalable brands with time-tested appeal to younger consumers.
Goldman Sachs declined to comment for the story. Emails sent to Samara Capital and boutique investment bank Euromax Capital, which advised Yum on the transaction, did not elicit any response.
This is the second investment in the Indian restaurant space for Goldman Sachs this year. Earlier in July, Goldman invested $10 million in Azure Hospitality, which runs pan-Asian cuisine chain Mamagoto.
“Yum was looking to reorganize its Indian business by reducing the number of franchisee partners and bringing in investors with deep pockets to help expand presence in an increasingly competitive market,” said a person aware of the development, adding that the simplified structure post the transaction will help Yum grow the business more efficiently. He requested anonymity as he is not authorized to speak to the media.
To be sure, Yum’s India division is still a loss-making unit.
In a financial earnings release dated 4 February 2015, operating loss for the India unit was $9 million for the year 2014. The company’s fiscal year ends in the latter half of December.
For the June quarter (ending 13 June), operating loss was $3 million, as compared to an operating loss of $1 million in the previous year.
Yum Brands in India operates 395 KFC outlets, 180 Pizza Hut casual dining restaurants, 250 Pizza Hut delivery outlets and 7 Taco Bell stores.
The New Delhi-based Burman family (promoters of consumer goods company Dabur India Ltd) is the franchisee for Taco Bell in the north and the east India.
The Indian food services industry (FSI) is worth Rs.6.27 trillion with the market projected to grow to Rs.10.1 trillion by 2019.
Total outlets in the consumer food industry increased to 2.15 million in 2014 from 2.07 milllion in 2013, an increase of 3.7%.
The past two years have seen a tepid growth for the industry on account of the spiralling inflation and a not-so-buoyant consumer sentiment. So, assets in the market come at a better valuation, said sector experts. “This is the right time to buy assets, since fast-food, as a category, has softened,” said a top executive at a fast-food chain who did not wish to be named.
Some believe that Yum’s move to combine assets under a well-capitalized entity is an experimental but smart move.
“We’ve seen that recently, with Burger King and Everstone, how a fund has invested in the segment. This is a smart move for Yum too, since smaller franchisees often lack the financial appetite to scale business,” said the head of a large fast-food chain, on condition of anonymity, adding that the deal also takes away from Yum the risks involved in further investments.
“Clearly Yum does not want to pump money in a market where it is losing money, instead put the burden of capex (capital expenditure) on a third entity,” he said.
The Sapphire Foods investment will make 2015 the best year for PE investments in the restaurant space in the last 10 years. So far this year, $121.5 million (across 17 deals) has been invested in the sector, according to data fromVCCEdge, the financial research platform of VCCircle.com.
In the last five years, the sector has seen $726 million worth of investment from private equity and venture capital investors, according to the data.
This article was first published on Livemint.com