The consolidation game

The Merger

Westlife Development had announced the consolidation of some of its group companies. As a result, Hardcastle Restaurants Private Limited (HRPL) will become its direct subsidiary. Hardcastle is the Master Franchisee for west and south India operations for McDonald’s Restaurants.  Westlife is listed on the Bombay Stock Exchange (BSE: 505533).

With this move, the Jatia family aims at accelerating the business for McDonalds in India in their terrain.  Amit Jatia, Vice-Chairman of Westlife Development Limited said, “The consolidation of our companies under Westlife Development opens up options for us to accelerate our growth plans for expanding McDonald’s restaurants in west and south India. The consolidation will also open up opportunities for the India market to invest in the growth of the McDonald’s Franchisee, HRPL, through Westlife Development.”     

Hardcastle stature

HRPL currently has a footprint of 148 restaurants across west and south markets. HRPL grew its restaurant footprint by 20 per cent in fiscal 2011-12 ending March 31, 2012, increasing its store count from 107 to 130 since the last year. It has been swiftly growing at a CAGR of 22.34 per cent over the last three years. It serves over 165 million customers, annually, across 14 cities in the states of Andhra Pradesh, Gujarat, Karnataka, Madhya Pradesh, Maharashtra and Tamil Nadu and provides employment to over 7,000 employees in west and south India.

 The stocks

The announcement hit the stock exchange just the way the Jatia’s would have anticipated. Westlife stock shot up `63 in just a single day following the announcement. However, Jatia says, “Today price doesn’t effect the value of the merged entity. As discovery happens, share price will find its spot.”

As per Harminder Sahni, Managing Director, Wazir Advisors, “It’s an interesting move by an Indian franchisee to unlock value in their business that otherwise would not be easy to unlock. It offers liquidity to investor without actually diluting their equity in the joint venture with McDondalds. Westlife which was an unknown and hardly traded stock will suddenly compete with the likes of Jubilant Foods and Specialty restaurants. I reckon it will be highly valued and will give stupendous returns to investors in long term whenever McDonalds may choose to buy the franchisee.”

Future for McDonalds

HRPL plans to aggressively increase their retail footprint to fortify their presence in the existing market and enter newer markets. Moving forward, they will increase convenience to match consumer demand through broadening their accessibility, extending operating hours and increasing their functionality. They will focus resources towards the optimisation of their restaurant portfolio through restaurant development strategies centered on convenience platforms and brand extensions. They will deploy brand extensions such as McDelivery, Drive Thrus, Kiosks and 24x7 Operations, and also focus on re-imaging McDonald’s restaurants with fresh and contemporary designs to enhance customer experience and brand relevance. Jatia reiterates, “We will drive core and new product offerings and expand the beverage landscape to gain share across key day-parts, consumer segments and product categories.”

 As per Sahni, this move should be a successful one. He says, “I think it will be a big hit. There is a lot of appetite for consumer centric stocks and within that for food services and there aren’t too many good stocks there and nothing comparable to a stock that owns McDonald’s franchisee in India.”

However, the company doesn’t plan to open the IPO just as yet. After the completion of the consolidation, which should take about six months, the company will assess he capital requirement as per its requirement plan the IPO.