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The company opened its first Swiss Chalet in 1954.KEVIN VAN PAASSEN/The Globe and Mail

Two of Canada's biggest restaurant operators are merging as Cara Operations swallows Prime Restaurants Inc., bringing banners such as Swiss Chalet, Montana's and East Side Mario's into one group with about 850 locations.

Cara, the owner of Swiss Chalet and Harvey's with roots in the mid-nineteenth century, is set to buy Prime from Fairfax Financial Holdings Ltd., said people familiar with the situation. The valuation is not yet clear. Fairfax is said to be helping to finance the transaction and will keep a stake in the combined group.

The restaurant business is a tough one, especially for table service restaurants such as Montana's and East Side Mario's. According to the Canadian Restaurant and Foodservices Association, those in the industry are "cautious about the future" and the number of table service restaurants that say sales will pick up in coming months is slipping. Customers resist higher prices, the CRFA said in a recent report, while restaurants are paying more for food.

That's a combination that can squeeze margins. In that environment, scale matters.

It's Cara's second crack at buying Prime. In 2011, Fairfax outbid Cara for Prime, which had gone public as an income trust. Dealing with post-crisis economic softness and the government's changes to income trust rules, the company decided to go private. Fairfax paid $71-million, topping the $59-million that Cara offered.

At that time, Prime had annual sales of about $340-million. It operates East Side Mario's, Casey's, and a nationwide chain of Irish-themed pubs. Today it has about 150 restaurants.

Vaughan, Ontario-based Cara is controlled by the Phelan family, and is the bigger half of the merger. The company has more than 700 restaurants.

The company has been a food-service institution in Canada since the mid-1850s, when the founder began selling snacks and newspapers on steamboats. Soon the company was running snack stands in railway stations. The company opened its first Swiss Chalet in 1954. For a time, Cara was publicly traded, but the Phelan family took it private in 2004.

Bill Gregson, who ran the Brick furniture business, has been touted as a likely chief executive officer of the combined restaurant group. He knows consumer businesses, having also run sporting goods chain Forzani Group. He is also familiar to Fairfax, which was a longtime investor in The Brick.