(BLOOMBERG) – A troubled British consumer brand with an illustrious past. Too much debt. A big Chinese investor. Sound familiar?
Pizza Express Ltd, which is preparing for debt talks with creditors, is being compared to Thomas Cook Group, the travel operator that collapsed last month. The 54-year-old restaurant chain isn’t in as precarious a state as Thomas Cook was for much of this year. But it needs to learn some lessons from the unhappy fate of the British tour operator.
Owned by the Chinese private equity group Hony Capital, Pizza Express has been hurt by similar “casual dining” chains opening too many outlets and a consumer slowdown. Some rivals have collapsed, such as Jamie’s Italian, while others have closed stores, like Prezzo.
Pizza Express has been expanding in China too, which hasn’t paid off. Like-for-like sales outside the UK fell 7.5 per cent in the year to Dec 30, 2018, the last accounts available. Its high borrowings are another worry, with total debt of £1.1 billion pounds (S$1.86 billion) at the end of 2018. The group made a £55 million loss last year, compared to a pretax profit of £28.7 million in 2017.
Fortunately it isn’t as much a hostage to consumer confidence as Thomas Cook. People booking a meal on a Saturday night won’t worry too much whether the the restaurant will still be there on Monday. When you’re booking a holiday, you want to know the tour operator will still be in business to fly you there and to get you home. That fear added to the death spiral at Thomas Cook.
Nevertheless, Pizza Express is headed for a debt restructuring, which will probably be tortuous. It had £47.9 million of cash on its balance sheet at the end of 2018, and made cash from operating activities of £33.3 million that year. It doesn’t face an immediate liquidity crunch.
Yet its revolving bank credit facility is maturing in August 2020, and its bonds are falling due from August 2021, so it needs to make sure it has adequate future financing in place. If Thomas Cook is any guide, it better sort this out sooner rather than later.
There are several parts to Pizza Express’s debt, which will suffer different fates. Alongside a £500 million loan from Hony, there are two outstanding public bonds totaling £665 million which mature in two and three years’ time. They will probably be restructured if the group is to survive.
The power resides with the holders of the most senior £465 million bond, due in August 2021. That 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.
The more junior bond due in 2022 will be second in the queue and its holders won’t be looking forward to much recompense. But that is reflected in the bond’s knockdown price of about 20 pence in the pound.
Even if bondholders do take control of the UK business – as Debenhams’ debt investors did in April and Thomas Cook’s lenders and note-holders tried to do recently – Pizza Express’s difficulties won’t be over. Supply and demand in the casual restaurant sector is starting to match up again, given all the recent closures. But Brexit uncertainty is weighing on consumers, as weak September retail sales demonstrated.
At least Pizza Express has a chance to sort out its dough before things become terminal.
Andrea Felsted is a Bloomberg Opinion columnist covering the consumer and retail industries. Marcus Ashworth is a Bloomberg Opinion columnist covering European markets.