India’s KFC and Pizza Hut operators Sapphire Foods and Devyani International said on Thursday they will merge in a $934 million deal, creating a fast-food franchisee powerhouse in the world’s most populous country.
The deal comes as India’s fast-food franchisees grapple with higher costs, slowing same-store sales and margin pressure, while facing stiff competition from McDonald’s and Domino’s Pizza operators in a market where consumers are cutting back on non-essential spending.
Devyani will issue 177 shares for every 100 shares of Sapphire as part of the deal and it expects annual synergies of Rs 210 crore to Rs 225 crore ($23.34 million to $25.01 million) from the second full year of operations of the combined entity.
The companies, partners of Yum Brands, run more than 3,000 outlets across India and overseas, including KFC and Pizza Hut dine-in restaurants and compete with the Indian operators of McDonald’s and Domino’s Pizza chains—Westlife Foodworld and Jubilant Foodworks.
Both the KFC and Pizza Hut franchisees in India operate at a net loss, making scalability a challenge, said Akshay D’Souza, an independent consumer goods consultant.
“With the single entity, if they are able to unlock even half of the expected synergies, we will be seeing a profitable enterprise… where they can control costs better.”
In the quarter ended September, Sapphire’s consolidated total costs rose 10% on-year to 7.68 billion rupees, while Devyani’s spending rose 14.4% to Rs 1,408 crore.
Devyani reported a net loss of Rs 21.9 crore for the quarter ended September 30, reversing a profit of Rs 170,000 a year earlier, while Sapphire posted a wider consolidated net loss of Rs 12.77 crore, compared with a loss of Rs 3.04 crore a year ago.
Reuters
