Blog 6.

Pizza Express is on the chopping board to be sliced up.

Pizza Express has been rolling dough since 1965 when they opened their first restaurant in Soho. The company are known for their distinctive original recipes that they’ve used for their pizzas since opening, however they are now in talks for a company debt reconstruction plan. The reconstruction will result in the bondholders of Pizza Express being in line for a large slice of the company hopefully with extra toppings.

Bonds can be defined as “medium or long-term bearer-from debt security, that commits the issuer to a specific repayment date and to interest pavements at a fixed or variable rate” (Watson, 2010).

Pizza Express is one of the UK’s most well-known Italian restaurants and has 436 UK stores (BBC News, 2014), but this does not mean that the overall organisation has not faced any struggles over the years. The current bondholders of Pizza Express have not been happy with the way the company has been conducting themselves in relation to their debt. The bondholders have become so concerned about the stability of the food provider that they have offered to fund the plan to help the business themselves. Shown as “A group of investors who own almost 70 per cent of the £465m of senior secured bonds told the board they were willing to provide extra money to secure the business, said two people with familiar with the situation” (Hancock, 2019).

Pizza Express was acquired by Chinese company Hony 5 years ago. Stated as Hony Capital, which acquired PizzaExpress in a 900 million-pound ($1.2 billion) leveraged buyout five years ago, has so far met the approach with silence, said the people, who asked not to be identified because the matter’s private (Linsell A. V., 2019).

Although the company are in significant debt they decided to expand their brand into Asia, hoping this would loosen up the deep debt the company has acquired. Chief executive Richard Hodgson said "expansion in Asia was a key part of future growth strategy” (BBC News, 2014). This was not the case, the expansion into new markets only left a bad review for the company." However the expansion into Asia meant that high borrowings are another worry, with total debt of 1.1 billion pounds ($1.3 billion) at the end of 2018. The group made a 55 million-pound loss last year, compared to a pre-tax profit of 28.7 million pounds in 2017(Ashworth, 2019).

The 54 year old restaurant chain is now being compared to Thomas Cook Group Plc who collapsed two months ago, however the state of Pizza Express is not in as such a precarious state as Thomas Cook. Meaning if they continue the way they have, they will no doubt end up the same as Thomas Cook Group Plc. The losses for the organisation are only growing as of the 26^th of November the company said its international arm will report a “small loss for the year driven by disruption in Hong Kong” This part of the business reported a loss of 300,000 pounds ($385,000) in the third quarter, compared with 200,000 pounds in earnings a year earlier (Linsell K. , 2019).

Pizza express are not the only high street Italian restaurant chain to be struggling at this moment in time with Jamie’s Italian collapsing earlier this year and Prezzo stores closing at an increasing rate. Pizza Express are heading for a debt restricting plan according to many articles on Bloomberg. The articles states that they need to make sure they have adequate future funds financing in place as of August 2020 as their bank credit facility is maturing.

Investors of Pizza Express are concerned that Hony is investing in the company’s debt opposed to the company’s operations. Shown as “Private equity firm Hony Capital will purchase as much as 80 million pounds ($103 million) of the company’s 200 million pounds of unsecured notes due August 2022, according to a statement sent to investors and confirmed by the company’s spokesman (Casiraghi, 2019).

Figure 1 - Source  (Ashworth, 2019)

Pizza Express' most senior bond has climbed significantly over the last year as shown  in Figure 1. Compared to the signs of distress the company are showing from the price drop in their most junior bonds, shown in Figure 2.

Figure 2 - Source  (Ashworth, 2019)

The power resides with the bondholders of the most senior 465 million-pound bond, due in August 2021. As this still trades relatively close to full value at 85 pence in the pound. These investors will have significant clout in this restructuring negotiation, and it’s no surprise that they’ve formed a committee to represent their interests. One possible outcome is that they swap their debt for a majority stake in the British Pizza Express business (Ashworth, 2019)

In conclusion It has been interesting to see how Pizza Express are dealing with the current debt that they are facing. Compared to the many other Italian food chain restaurants that are also struggling in the UK at the moment I think that Pizza Express may be able to roll its way back into safety. The expansion into Asia really hasn’t brought benefits to the company that they expected, so this needs to be restricted for further investments. The focus needs to be on the current 436 restaurants that are in the UK. Pizza Express could investigate the option of closing some of the restaurants to lower their debt and invest more capital into the most profitable locations of their restaurants. If Pizza Express were seen to be invested in their company rather than debt, then the bond holders may have more faith in the organisation. As the bonds both junior and senior are coming close to maturing then the private equity firm may struggle to refinance the current bonds, leaving a big mess for Pizza Express. The level of spending from the UK is decreasing due to the uncertainty in the economy from the general election and Brexit looming. Pizza Express need to find new ways to draw customers in to part with their hard-earned disposable income to spend in their restaurants.

The question of will Pizza Express survive the finical struggles they are facing at the minute can not be answered, it will be interesting to see how they plan to gain back profitability through internally their organisation.

References

Ashworth, A. F. (2019, October 9). PizzaExpress Is About to Be Sliced Up. Retrieved from PizzaExpress is headed for a debt restructuring. Expect its senior bondholders to take a big slice of the company.: https://www.bloomberg.com/opinion/articles/2019-10-09/pizzaexpress-is-about-to-be-sliced-up

BBC News. (2014, July 12). Pizza Express sold to Chinese firm Hony Capital for £900m. Retrieved from https://www.bbc.co.uk/news/business-28279203

Casiraghi, A. V. (2019, November 6). PizzaExpress’s Owner Starts Tackling Debt With Bond Buyback. Retrieved from Bloomberg: https://www.bloomberg.com/news/articles/2019-11-06/pizzaexpress-s-owner-starts-tackling-debt-pile-with-bond-buyback

Hancock, D. T. (2019, Novemeber 11). PizzaExpress bondholders escalate push for debt restructuring. Retrieved from Investors urge Chinese owners Hony to work with them to secure restaurant group’s future: https://www.ft.com/content/28459880-0493-11ea-9afa-d9e2401fa7ca

Linsell, A. V. (2019, November 16). PizzaExpress Owner Keeps Lenders Waiting for Debt Talks. Retrieved from Bloomberg: https://www.bloomberg.com/news/articles/2019-11-16/pizzaexpress-owner-keeps-lenders-waiting-for-crucial-debt-talks

Linsell, K. (2019, November 26). PizzaExpress Forecasts Annual Loss Overseas on Hong Kong Unrest. Retrieved from Bloomberg: https://www.bloomberg.com/news/articles/2019-11-26/pizzaexpress-forecasts-annual-loss-overseas-on-hong-kong-unrest

Watson, D. &. (2010). Corporate finance: principles and practice. Pearson Education.