Indian operators of KFC and Pizza Hut Sapphire Foods and Devyani International announced on Thursday that they will merge in a $934 million deal to create a franchise powerhouse in the world’s most populous country.
The deal comes as Indian fast-food franchisees grapple with higher costs, slowing same-store sales and margin pressure, while facing stiff competition from pizzeria operators McDonald’s and Domino’s in a market where consumers are cutting back on non-essential spending.
Devyani will issue 177 shares for every 100 Sapphire shares as part of the deal and expects annual synergies of 2.1 billion to 2.25 billion rupees ($23.34 million to $25.01 million) from the combined entity’s second full year of operations.
The companies, partners of Yum Brands, operate more than 3,000 outlets across India and overseas, including KFC and Pizza Hut restaurants, and compete with the Indian operators of McDonald’s and Domino’s Pizza – Westlife Foodworld and Jubilant Foodworks.
Both KFC and Pizza Hut franchisees operate at a net loss in India, so scalability is a challenge, said Akshay D’Souza, an independent consumer goods consultant.
“With a single entity, if they are able to unlock even half of the expected synergies, we will see a profitable business … where they can better control costs.”
In the quarter ended September, Sapphire’s consolidated total expenses rose 10% year-on-year to 7.68 billion rupees, while Devyani’s expenses rose 14.4% to 14.08 billion rupees.
Devyani posted a net loss of Rs 219 crore for the quarter ended September 30, reversing a profit of Rs 170,000 crore a year earlier, while Sapphire posted a wider consolidated net loss of Rs 127.7 crore, compared with a loss of Rs 30.4 crore a year ago.
(1 USD = 89.9625 INR)
