Pizza Express - thoughts on perimeter and fresh cash

All,

Qualification: The previous email on advisors to the company and to the SSNs still has rumour status. No engagements have been signed yet.

UK only:

- On the question of fresh cash and what the perimeter of a creditor owned Pizza Express should look like. We think it would be a waste to drop the international business at this stage and only go for the minimal risk option of UK-only. In that scenario, creditors may only have to bring £30m of fresh cash and finance the remaining refurbishment from increased CF, given lower interest going forward.

We'll get what we pay for:

- But that would be short sighted. The stabilisation of the UK operation - with some additional cash to refurbish the restaurants should be - relatively - low risk. But from the relatively high value of where the SSNs are already (6x EBITDA @ 85p/£), the equity multiplier will also be low. Hony paid 9x for the company, but that was with a small, but expandable business in HK and Shanghai (bought separately, but included in the 9x). Without that the multiple was closer to 8x.

- Also the investment was made in good times. If taking only the UK operations and subtracting some 0.5x in fees and fresh cash etc, then the most SSNs can expect is a net 7x (if we are subtracting only 0.5x for the bleaker macro outlook today). Yes, macro may come back at some point, but for now its not an investment case and anyway, we’d know of better places to capture that.

- So an expansion from net 6x to net 7x - say on an expansion of EBITDA from £75m to £100m would afford the SSNs an upside of only 40%, or 20% p.a. over 2 years. That’s not really enough to lock up, hold equity and go illiquid for two years. Or perhaps it is, but only just about.

Keeping International:

- Clearly Pizza Express still harbour some unknowns as to the exact setup in the international supply chain and the associated cost accounting and we may be at risk of taking too much at face value. But given the Asian operation is (reported) as near as makes little difference EBITDA break-even -ish, the lay-out of another £50m in fresh cash to correct the international strategy and bring it to scale could quickly become the best spent cash of the entire transaction - both in terms of EBITDA growth and in terms of multiple expansion. Holding true the additional 1x multiple for an international business (and in today’s UK, that difference should arguably be more) the additional £50m of fresh cash should double (2x multiplier) purely for keeping the international business - no additional performance).

Naturally the strategy won’t be as safe, but we believe an equity position should be approached with an equity strategy - or else its perhaps better to stick to debt positions.

Wolfgang