A few months ago, Sapphire Foods and Devyani International announced their merger, and India is about to get its largest Yum! Brands’ quick-service restaurant (QSR).

Yum! Is a US-based fast food giant behind KFC, Pizza Hut, Taco Bell, Habit Burger Grill and the like. It owns these brands, decides everything from recipes and menus to store layouts, marketing, and operating rules, but it doesn’t run these restaurants. Instead, it franchises its brands and takes a cut from sales as royalties and fees.

Why are the companies merging?

In India, Devyani International and Sapphire Foods India are Yum!’s large franchise partners. Devyani is older (since 1991), while Sapphire came in much later. These franchises are not separated by brands, instead, they are separated by geographical locations.

Devyani has a major footprint in Northern and Eastern India, while Saphire Foods operates mostly in Western and Southern India.

Back then, having two franchisees helped Yum! as the penetration of QSRs in India was low, incomes were rising, and millions of people were moving to cities. Devyani started early and helped in scaling, whereas Sapphire brought in fresh capital and expanded ino regions that were still untapped.

Initially, this helped in testing prices, store formats, and expansion strategies. Moreover, if one slowed down, the other helped in expanding the business. Over time, the markets started overlapping and the these restaurants started cannibalizing each other’s customers instead of growing the market. This likely pushed Yum! to merge both entities. 

The merger might help Yum! to eliminate redundant corporate overheads, optimize supply chains, integrate direct procurement pipelines, and gain far greater leverage when negotiating rentals with commercial landlords and commissions with food delivery platforms.

Sapphire Foods will eventually be dissolved, and its entire corporate footprint will be integrated directly into Devyani International. 

The Recent Development

Shares of Devyani International and Sapphire Foods gained up to 9% on Tuesday after the exchanges said that they had no adverse observations on the proposed scheme from the standpoint of listing regulations, enabling the companies to file the merger proposal before the National Company Law Tribunal (NCLT).

However, they have directed the companies to make additional disclosures to shareholders before seeking approval for the scheme. These include details of pre and post-merger shareholding patterns, assets and liabilities proposed to be transferred, pending litigation or regulatory proceedings, promoter reclassification plans, and Sapphire Foods Mauritius’ proposed stake sale to Arctic International.

Moreover, the BSE clarified that its observations should not be interpreted as an approval of the merger. The observation letters by both the exchanges will remain valid for six months, during which the companies are required to submit the scheme to the NCLT for further consideration.