PizzaExpress Is an Epic $1.4 Billion Food Fight

(Bloomberg Opinion) -- PizzaExpress Ltd. is something of a British national treasure having delivered quasi-Italian cuisine to the High Street for 54 years. It's found itself in a battle for survival in the U.K.'s uber-competitive “casual dining” arena, and has consequently been caught up in a proper tussle in the bond market.

Commercially, the restaurant chain is battling on two fronts: that ferocious fight in its domestic market and coping with an unsuccessful expansion in China. Comparable sales outside of the U.K. fell 7.5% last year.

With total borrowings of 1.1 billion pounds ($1.4 billion), and a revolving credit facility maturing in August 2020, PizzaExpress is headed for a debt restructuring. And that's shaping up as an arm wrestle for control between the sole shareholder, Chinese private equity firm Hony Capital, and a group of funds holding most of the company's senior 465 million-pound August 2021 bond.

The balance of power has shifted steadily toward these bondholders as their debt is secured by the tangible assets of the group. They've formed an action committee and appointed advisers. They want to engage with Hony and put together a debt-for-equity swap that would in effect transfer control of PizzaExpress's U.K. business to themselves. Given its storied history, the chain could be revitalized.

We estimate Pizza Express's Ebitda would probably be between 50 million pounds and 75 million pounds in 2020, and it should be able to sustain debt of about five times that (250-375 million pounds). But getting to that debt level from the current 1.1 billion pounds will demand huge sacrifices from all equity and debt-holders. The question as ever in these situations is who takes more of the pain?

Any deal will require a substantial write-down of the senior debt. That's something the holders are prepared to contemplate, but only in exchange for equity control of the restructured U.K. entity. That in turn means a potential wipe-out of the subordinated debt.

But Hony isn't about to hand over the keys of the U.K. business without a fight. It plunged 900 million pounds into buying Pizza Express in 2014 and has a 500 million-pound loan to the business. As part of its defense, it's taking the unusual step of tendering for 80 million pounds of the junior debt to take its existing share of the subordinated bonds to 50%. And it's offering to pay 40% of face value, three times the price at which the distressed notes were languishing at the end of October.

It is certainly a show of determination that Hony wants to retain control. Nonetheless, its next steps are far from clear. 

One possibility is that having secured control of the subordinated bond, it can “up-tier” to lift the note's status to be more senior in the capital structure. Up-tiering is a highly unusual move in corporate finance and there's no certainty that it can so radically amend the existing terms. Another option is that it repays the existing junior bond and replaces it with a new more senior security to give Hony greater power in the inevitable debt restructuring. 

PizzaExpress seems to be an asset still worth fighting for, which is good news for fans of its “keep-the-kids-happy” format. But this is turning into an epic standoff between the Chinese firm and its Western rivals. Time to order a home delivery and watch the action.

--With assistance from Andrea Felsted.

To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.

©2019 Bloomberg L.P.