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Startup 2015-01-14

Striking a Good Deal!

Lately, M&A deals have become the flavour of the season as we have seen an increasing number of such deals happening in the retail industry. And keeping pace with the larger retail industry, F&B retail has also seen some developments in this area.

By Deputy Features Editor
Striking a Good Deal!

There are two types of M&A deals currently ruling the Indian F&B industry. The first one is, traditional capital raising deals that independent entrepreneurs are doing to expand their business across the country.

And, the second one refers to the consolidation policy, where the brands are buying stakes or acquiring complete stake of a brand, thereby trying to get the economies of scale at a faster pace, and for that, they are merging with an existing brand.

In case of Punjab Grill, Lite Bite Food (LBF) acquired the brand and integrated with LBF, whereas in case of Om Pizza, that has acquired Pizza Corner, it’s been a merger deal to raise economies of scale, to make the business more profitable. Om Pizzas & Eats Pvt Ltd, the Indian franchisee of Papa John’s International, has merged with Fred Mouawad pizza business of Global Franchise Architects, operating under the Pizza Corner brand. Om Pizza & Eats Pvt Ltd is owned by Avan Projects Pvt Ltd, promoted by Atulya Mittal. TVS Capital and the Jawad Group of Bahrain hold a minority stake in Om Pizza.

As per the deal, Papa John’s will convert the existing Pizza Corner stores to Papa John’s branded restaurants, by the first quarter of 2015. The announcement reinforced Papa John’s commitment to expand its presence in India, specifically in Bangalore, Chennai and Hyderabad.

“Merger happens in case of penetrating the new market, as in case of Papa John’s, where they wanted to penetrate Chennai and the South India market and Pizza Corner gives them a 30-40 existing restaurant size, which will be converted into Papa John’s overnight,” shared, Ashish Saxena, Partner, TVS Capital.

“Through this merger with a leading brand such as Papa John’s, we have a phenomenal opportunity to meet growing demands by combining Papa John’s world-class pedigree with Pizza Corner’s local expertise. We are confident that both the brands can complement each other and implement their expertise,” explained Joseph Cherian, CEO of GFA Global.

Commenting on the same, John Schnatter, Founder & CEO, Papa John’s Global shared, “We are energised about this accelerated international expansion for Papa John’s in Southern India. The merger provides us the opportunity to penetrate the market at a much more rapid pace, and increase our scale in a shorter period.”

What’s driving

The slowdown in number of outlets, cost cutting in managing the central kitchen and the backend of a brand is leading to sluggish organic growth of players, where they are going in for acquisitions to achieve economies of scale. And according to experts, the industry could see more such buys in the coming months, where the small players or the franchisees may sell their existing business to a big player or the franchisee, which is successfully running business.

Moreover, each brand or every restaurateur today wants to reach out to a good number of customers, to deliver better ingredients, best quality product promising to create a preferred brand for the people in the country.

“As far as Pizza Corner is concerned they have not very aggressively been able to grow as a high quality brand anymore. So, it was good to merge with the Papa John’s Pizza, as it will help them to convert an available model into a pretty well international brand. So, for both the partners, it is a win-win strategy bringing more quality and strategy in the pizza business,” informed, Siddharth Bafna, Partner, Lodha & Co.

Framework

The joining partners go through certain frameworks to operate their brand when they merge to create a better brand, penetrating a larger market. In case of Papa John’s and Pizza Corner, Papa John’s will have its own marketing and overhead expenses and Pizza Corner will create synergies in areas like real estate leases and create value for investors by diversifying into different categories. Papa John’s will also use the outlet footprints of Pizza Corner to expand its business in the area. This milestone also marks the addition of a good team that has built a multi-unit region focused franchise integrating into the current Om Pizza team or the Papa John’s team.

Commenting on the same, Atulya Mittal, Director, Avan Projects, which owns Papa John’s in India, said, “We were thinking of ways to grow the brand to reach a critical mass of stores. We want to reach a good number of customers to deliver our better ingredients, better pizza promise and create the preferred pizza brand within the country, so this opportunity made sense. However, there are a lot of softer issues that attracted us to Pizza Corner. The strength of its management team, as well as the strength of GFA, our new partner, really convinced us that this was the right company to work with.”

Areas to look upon

Merging and acquisition strengthen the growth of a brand to compete with the other brands in the same race. When merger happens, a seller always looks at what money he is getting in return, while the buyer is looking at ways to improve the business by adding the number of outlets and integrating an encouraged team, as it would be an ideal platform to lift the company’s growth.

Mittal said, “From the point of view of the seller, I think that they don't want to grow their store count further and are happy to cash out as some franchisees and brands that have been in the country for a few decades now, and it's a good market environment for an exit. And the basic underlying theme from the point of view of the buyer is to achieve faster growth.”

“The seller generally looks at ways to cashing out when he plans to merge or acquire a brand and the buyer looks at the synergy benefits that he will be getting post acquisition and merger,” shared, Rajesh Shrivastava, Chairman & MD, Rabo Equity Advisor.

Way ahead

The restaurant industry is the most fragmented sector in India, therefore, consolidations will help every party, but presently, the industry does not see many players in the space who want to run a large chain or want to be a big player. And experts think, because of M&As, good brands will be acquired by PEs or other players, who have this wish to consolidate and lift the holding company, which houses under it different small players. Thus, we will see consolidations in QSR space for sure, in the years to come. Pizza Hut and KFC consolidations may happen. Some of the small franchisees of KFC may merge with the bigger ones, predict experts.

Speaking on the same, Hemendra Mathur, MD, SEAF India Investment Advisor, said, “Smaller players don’t have capital to scale beyond one or two cities, nor the expertise to launch multiple brands and formats, hence, they end up selling to bigger players, who can, and we will see consolidation in the business soon.”

Hence, the bigger picture in the restaurant business is that as disposable income rises, along with more nuclear families and working women in India, there is a way forward for the business to grow and consolidate, as the country develops further.

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