If the negotiations are successful, Samara Capital, CX Partners and a West Asia-based investment firm will together buy out the franchise rights from the US fast-food chain, the Dodsal Group which runs 84 Pizza Hut outlets in west and south India as a franchisee, and several other smaller franchise partners, three people familiar with the development said, requesting anonymity. Mint could not ascertain the name of the West Asian firm.
Incidentally, Yum has been in talks with prospective investors for over a year now.
“The firm is looking at selling around 250-300 stores, which includes the 84 Pizza Hut outlets of the Dodsal Group. Also, Yum is selling several of its directly-owned stores across the country and several other smaller franchisees are also selling their stores. The final number of stores that will be sold has not been frozen yet, which could lead to an increase in the deal value," said the first person mentioned above.
Yum Brands, which in 2013 announced plans to invest $100 million in India over three-four years, is trying to develop a strong franchise network by replacing a clutch of smaller companies that run the company’s restaurants now. The financial muscle of the private equity companies will be critical as Yum Brands expands to smaller cities and takes on established rivals in Asia’s third largest economy.
The success of Domino’s Pizza, run by Jubilant FoodWorks Ltd in India, has been attributed to the company’s strong franchise network and its popular 30-minute doorstep delivery assurance. India became Domino’s largest market outside the US in December with more than 800 outlets.
“Smaller franchisees clearly cannot do justice to the company’s growth ambitions," said Gaurav Marya, head of Franchise India, an organization that helps foreign retailers appoint franchisees in the country. Yum Brands wants someone who can park money in the business for the long haul, “so they could be looking at large funds as well as family businesses", he said.
Yum Brands plans to more than double the number of restaurants in India to 2,000 over the next 5-7 years. “Yum is one of the largest and fastest growing restaurant companies in India. We are extremely bullish and committed to the huge opportunity that the country offers for each of our brands. Our ambition is to more than double the number of restaurants. We continue to explore opportunities to partner with big franchise players to help us achieve the same and, in the process, create significant value for all stakeholders, for the long term," said Ankush Tuli, chief financial officer at Yum India, which currently runs close to 800 restaurants, less than 30% of which are company-owned.
Sumeet Narang, founder and managing director at Samara Capital, and Ajay Relan, founder and managing partner at CX Partners, declined to comment.
This would be the first time that home-grown private equity funds have come together to acquire an asset.
In April 2014, The Economic Times had reported that the Dubai-based Dodsal Group had hired boutique investment bank Euromax Capital to sell the franchise rights of its Pizza Hut outlets in south and west India.
“The deal is a highly structured one and Yum is looking at simplifying its organizational structure, as currently it has mix of several franchisees and own stores. The new third entity created will have its own organizational structure with a designated head leading the business. The move will then spread Yum’s business in India across three larger entities—RJ Corp., Yum and the new franchisee," the second person cited above said.
The Delhi-based RJ Corp., owned by Ravi Jaipuria, is Yum’s largest partner in India. Yum runs some of the KFC restaurants in south India. Four other smaller franchisees run Pizza Hut and KFC restaurants in parts of west and south India. All its Pizza Hut outlets in India are run by partners.
In the north, RJ Corp. owns about 85 KFC restaurants apart from running Pizza Hut Delivery operations across India. Yum Brands recently mandated the Delhi-based Burman family (promoters of consumer goods company Dabur India Ltd) as the franchisee for Taco Bell in north and east India.
“Yum has a separate franchisee in Punjab, a separate one for KFC in Delhi as well as owned KFC stores in Delhi. So the deal will help simplify this structure to some extent. They want to bring on board investors with deep pockets who can help expand the presence of these brands," said the second person mentioned above.
“Yum will continue to have equity invested in the country," said the third person while adding, “It will hold ownership of part of the KFC outlets in India, but is also relying on a large partner who can do justice to the tremendous growth plans laid out for the three brands."
The move comes as competition in India’s ₹ 6000-crore fast-food restaurant industry has intensified after some of the world’s largest chains made public their plans to open more restaurants in India.
Last year, American chain Burger King launched in India, reaping benefits of a market largely cultivated by rivals McDonald’s and KFC, which have spent decades trying to customize Western menus to suit Indian consumers.
“PE funds are keen to invest in established restaurant businesses which have a long operating history, brand name and significant growth potential. Funds are looking to scale these businesses and later either exit through a strategic sale or a public market listing," said Vineet Toshniwal, managing director at Equirus Capital Pvt Ltd.
Yum’s sales in India have softened in recent quarters over weak consumer demand and competition from Jubilant FoodWorks.
Yum India restaurants’ same-store sales for the three months ended 31 March fell 11% from a year earlier, according to a 22 April report by brokerage firm Edelweiss Securities.
The promoters of HT Media Ltd, which publishes Hindustan Times and Mint, and Jubilant FoodWorks are closely related. There are no promoter crossholdings.