(Jan 2): The two operators of KFC and Pizza Hut restaurants in India have agreed to merge in a share swap deal worth about US$933 million, according to stock exchange filings on Thursday.
Yum! Brands Inc’s largest Indian franchisee Devyani International Ltd will issue 177 shares for every 100 shares of Sapphire Foods India Ltd, according to a filing. Yum! Brands has approved the plan, and the deal will come into effect from April 1.
Devyani will issue 568.85 million shares in total to the holders of Sapphire, indicating a valuation of about 83.9 billion rupees at the closing price of the shares on Thursday, Bloomberg calculation showed.
Shares of Devyani jumped as much as 8.3% on Friday, their biggest gain since August, while Sapphire fell as much as 6% to the lowest level in two months.
The merger will consolidate the KFC and Pizza Hut stores, bring them under a single entity in India’s fiercely competitive quick-service restaurant market. Fast-food chains have faced slowing sales growth in recent quarters due to weak consumer demand, while competition has intensified between established players such as McDonald’s operator Westlife FoodWorld and Domino’s Pizza operator Jubilant FoodWorks, as well as upstarts including Wow Momo Foods Pvt.
The deal will create economies of scale, reduce overheads, boost operational efficiencies as well as enhance bargaining power with suppliers and vendors, the two franchisees said in separate statements.
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Devyani operates more than 2,000 stores across 280 cities in India, Nigeria, Nepal and Thailand. These include Yum! Brands’ KFC and Pizza Hut chains. Sapphire Foods is also a Yum franchisee operating about 1,000 restaurants of KFC, Pizza Hut and Taco Bell in India and Sri Lanka.
Devyani will become a “pan-India play”, comparable to rival Jubilant FoodWorks, Jefferies’ analysts led by Vivek Maheshwari wrote in a Jan 2 note. The merged unit will focus on accelerating KFC’s expansion, strengthening Pizza Hut for long-term growth, and scaling emerging brands like the Indian food chain Vaango!, according to the note.
The merger will require regulatory approvals, including from India’s competition watchdog, and the process is expected to take about 12 to 15 months, according to the statements.
The full integration of the two entities, and realisation of benefits, is expected to be achieved within 18 months from the effective date of the merger, they said.
A key benefit from the deal will also translate into revised terms with Yum! India which could lead to better operational rights and waiver of royalty fees, Citi research analyst Ashish Kanodia said in a note.
Separately, Devyani will acquire 19 KFC stores owned by Yum! India for 900 million rupees in cash. The Indian operator will also pay 3.2 billion rupees to Yum for rights to proceed with the merger and for additional territory rights.
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