Devyani International to Merge Sapphire Foods to Scale Operations

KFC and Pizza Hut operator Sapphire Foods India Limited will be merged into Devyani International Limited, another major restaurant franchisee, as the two companies seek scale amid a slowdown in consumer spending. The companies announced the proposed merger in a statement on Thursday, January 1.

The move comes at a time when fast food operators in India are facing pressure from weakening same store sales and rising costs. High living expenses have led consumers to cut back on eating out and food delivery, affecting revenues and margins across the sector.

Under the proposed deal, Devyani International will issue 177 equity shares for every 100 shares held by Sapphire Foods shareholders. Devyani expects the combined entity to generate annual synergies of INR 210 crore to INR 225 crore from the second full year after the merger becomes effective.

As part of the transaction, group company Arctic International will acquire around 18.5 per cent of Sapphire Foods' paid up equity from existing promoters with an option to assign this stake to a mutually agreed investor.

The merger will require approvals from stock exchanges, the Competition Commission of India, National Company Law Tribunals and shareholders and creditors of both companies. The approval process is expected to take about 12 to 15 months.

Both Devyani and Sapphire are franchise partners of Yum Brands and together operate more than 3,000 outlets in India and overseas. Their portfolio includes KFC and Pizza Hut formats and they compete with players such as Westlife Foodworld and Jubilant Foodworks.

"Upon completion, the transaction will result in Devyani International becoming one of the largest quick service restaurant operators in India" the filing stated.

"The consolidation of Devyani International Limited and Sapphire Foods India Limited marks a significant milestone and a decisive leap forward in our growth journey, resulting in DIL holding franchise rights across the entire Indian market for KFC and Pizza Hut brands. The merger also adds a strong international presence in Sri Lanka, which complements our existing overseas operations" said Ravi Jaipuria, Non-Executive Chairman of Devyani International Limited.

Financially, both companies have faced pressure in recent quarters. In the quarter ended September, Sapphire's consolidated total costs rose 10 percent year on year to INR 768 crore, while Devyani's expenses increased 14.4 percent to INR 1,408 crore.

Devyani reported a net loss of INR 21.9 crore, while Sapphire posted a net loss of INR 12.77 crore respectively.