(FT) Chinese owner looks to tighten grip on PizzaExpress

Daniel Thomas and Alice Hancock NOVEMBER 22 2019

Hony Capital plans to buy more debt in struggling chain, giving it a bigger say in any restructuring

Chinese private equity group Hony Capital plans to tighten its grip on PizzaExpress with an agreement to buy an additional £80m of its bonds at a steep discount, giving it more control over any restructuring of the UK restaurant chain’s debts.

The move, which was opposed by some debt holders over concerns they could be marginalised, makes a restructuring more likely, analysts said.

PizzaExpress, which was bought by Hony in a £900m leveraged buyout in 2014, revealed a debt pile of £1.1bn in its annual report in April. Like many UK restaurant chains, it has been struggling for several years with rising costs and increasing competition, thanks to general private equity fuelled expansion in the sector in the early part of the decade.

This week, rating agency Moody’s described Hony’s tender offer for £80m of PizzaExpress’s unsecured debt at a 60 per cent discount to face value as “an aggressive financial policy’,’ giving “Hony important negotiating leverage in the event of restructuring talks”. Moody’s said it would consider a successful offer to be a “distressed exchange”.

The pizza chain’s other bondholders have called on Hony to work with them to reduce the company’s debt, which analysts estimate has exceeded the equity value of the business and will force it to restructure. However, Hony has so far not met the largest group of bondholders.

Hony did not respond to a request for comment.

A source close to PizzaExpress said that “the view from the business is that it is good news that Hony is investing money and buying back bonds”.

Bondholders have criticised Hony for not investing in the UK business and using funds instead to expand PizzaExpress in China, under the Pizza Marzano brand.

Only one PizzaExpress opened in the UK in the first half of 2019 but three restaurants opened in China. In a statement published with its half-year results in August, Jianlong Wang, chairman of the chain, said it was planning to focus capital investment “on upgrading our existing estate rather than adding more sites”.

Hony announced its intention to buy the £80m of the chain’s £200m of unsecured bonds in October. It already owns £22.7m of these bonds.

In a release seen by the FT on Friday, Union Harvest Group, an affiliate of Hony Capital, said the bonds had been tendered at 40 per cent of their face value.

One bondholder said that any restructuring talks would now be “messier than expected. Hony will now fight rather than give up the keys. The debt gives them a bigger voice at the table.”

Wolfgang Felix, head of Sarria, a financial adviser, said: “Everyone is trying to interpret what Hony does next. There are a few options open to them now. The maturity of the debt in 2021 is as good as tomorrow in terms of how fast PizzaExpress is going to turn round.”

Moody’s downgraded the credit rating of the chain on Monday, saying that “the recent actions of the company’s shareholders make a restructuring of the company’s debt highly likely”. It said it expects the “challenging trading conditions and cost pressures that have weighed on the profitability of PizzaExpress for the last two or more years to persist.”

PizzaExpress declined to comment.