Yum Brands in talks to facilitate merger of its two Indian partners, ET reports

July 4 (Reuters) - Yum Brands YUM.N, which owns KFC and Pizza Hut, is in talks to facilitate a merger of its Indian franchisee partners Devyani International DEVY.NS and Sapphire Foods SAPI.NS, the Economic Times reported on Friday, citing sources.

Shares of Sapphire Foods rose as much as 10.7% after the report, closing about 4% higher for the day. Devyani closed 3.5% higher.

Most fast food franchisees across India have been struggling with a slowdown in same-store sales growth and margin expansion, as consumers reeling under high cost of living cut back on dining out and ordering in.

The two license partners said in separate exchange filings that they had no material information to disclose, adding that they evaluate various strategic opportunities in the ordinary course of business.

Sapphire reported a 6% sequential decline in KFC and 13% sequential decline in Pizza Hut's average daily sales for the quarter ended March, while Devyani's KFC same-store sales saw a decline of 6.1% in the fourth quarter year-on-year. However, its Pizza Hut same-store sales grew 1%.

The talks could see Sapphire Foods merge into Devyani International via a share swap, with Sapphire shareholders potentially receiving one Devyani share for every three held, the newspaper reported, citing one source.

The deal may involve Devyani acquiring Sapphire's KFC and Pizza Hut franchise rights, or consolidating all KFC franchisee stores in India under Devyani, the report added.

U.S.-based Yum Brands did not immediately respond to a request for comment outside regular business hours.

Devyani's market capitalization is at 213.2 billion Indian rupees ($2.50 billion), while Sapphire's stood at 107.2 billion rupees, according to data from National Stock Exchange of India.

Devyani had more than 2,000 stores across its network in India, Thailand, Nigeria and Nepal, as of March 31. Sapphire had 836 KFC and Pizza Hut restaurants in India and 127 Pizza Hut and Taco Bell restaurants in Sri Lanka as of March end.

($1 = 85.3610 Indian rupees)