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Dado Ruvik | Reuters
Operator of KFC and Pizza Hut in India; Sapphire Foods India and Devyani Internationalannounced Thursday that the two companies will merge in a $934 million deal to create a fast-food franchise powerhouse in the world’s most populous country.
The deal comes as India’s fast-food franchisees face higher costs, slower same-store sales and squeezed margins, while facing stiff competition from operators McDonald’s MCD.N and Domino’s Pizza Inc DPZ.O in a market where consumers are cutting back on non-essential spending.
Debyani will issue 177 shares for every 100 Sapphire shares as part of the transaction and expects annual synergies of 2.1 billion to 2.25 billion rupees ($23.34 million to $25.01 million) starting from the second full year of post-combination operations.
The companies, which are partners in Yum Brands YUM.N, operate more than 3,000 stores in India and abroad, including KFC and Pizza Hut dine-in restaurants, and compete with India’s Westlife Foodworld WEST.NS and Jubilant Foodworks JUBI.NS, which operate McDonald’s and Domino’s Pizza chains.
Akshay D’Souza, an independent consumer goods consultant, said both KFC and Pizza Hut franchisees in India were operating at a net loss, making scalability an issue.
“If we can extract even half of the expected synergies in a single entity, we will create a profitable company… We will be able to better control our costs.”
In the quarter ended September, Sapphire’s total consolidated costs rose 10% year-on-year to Rs 7.68 billion, while Devyani’s expenditure rose 14.4% to Rs 14.08 billion.
Devyani reported a net loss of Rs 219 crore for the quarter ended September 30, a reversal from a profit of Rs 170 crore in the year-ago period, while Sapphire’s consolidated net loss widened to Rs 127.7 crore from a loss of Rs 30.4 crore in the year-ago period.
(1 dollar = 89.9625 Indian rupees)
