Pizza Express has a mountain of debt: a towering £1.12bn is owed to various lenders, a cash sum equal to 77m of its famous Sloppy Giuseppe beef and pepper pizzas.
In recent days rumours have swirled that the 54-year-old business, one of the UK’s biggest casual dining chains, might be about to go the same way as Jamie’s Italian.
It needs to restructure that debt, which has left the business facing such a huge annual interest bill that for every £13 American Hot classic pizza ordered in one of its restaurants, the company has to hand over £2.23 to to cover its debt repayments.
The casual dining business in the UK is a tough place to make a profit. Diners are increasingly using online delivery services such as Deliveroo while business rates have increased and labour costs have risen with the improvements in the minimum wage.
At the same time consumer tastes have moved away from traditional dining staples such as Italian, Chinese and Indian food and towards Middle Eastern and Caribbean food and specialist vegetarian outlets.
While Pizza Express, which has 480 outlets in the UK and another 148 abroad, is trading better than some of its competitors, sales are still down and profit margins are thin.
Mark Brumby, an analyst at Langton Capital says profits have been hit by the need for heavy discounts – two for one on main meals, 15-25% discounts on food and meal deals for less than £16 – to tempt reluctant diners.
But it is the debt that is the problem, and this week’s Twitter panic was sparked by a report last weekend that the company is hiring debt restructuring advisers to put the business back on a firmer financial footing.
The company generated £543m of revenue last year, and £93m of that went straight out in debt repayments, helping to send it nearly £56m into the red.
The restaurant chain, founded by Peter Boizot in 1965, was bought in 2014 by Chinese firm Hony Capital for £920m. Of its current £1.12bn of debt, nearly £656m is owed to bond holders, with the rest due to Hony.
Analysts say Pizza Express is unlikely to fold, but reckon Hony may be forced to let go of the business or pump in further cash.
Some £465m of debt owed to bondholders is due for repayment in 2021, with £200m due the following year. These are the loans that need to be renegotiated.
The group’s secured bonds are trading at about 85p in the pound, but its senior loan notes are at less than 25p, indicating that the market is betting that the secured bondholders could gain control of the business.
One refinancing expert said: “It is a decent business with too much debt. A write-off of the Chinese debt looks likely. They could [then] do a debt for equity swap or restructure the rest of the debt so they stretch out the [repayments].”
Pizza Express has been trading under heavy debts for years, with hundreds of millions of pounds added to its debt pile after it was taken over by private equity group Cinven in 2006. That cash was largely used to finance the takeover.
Under Hony’s ownership, its debt has increased again, going from about £986m in 2015 to £1.1bn at the end of last year.
What’s really changed is the looming deadline for repayment and a squeeze on the market spurred by heavy competition, rising costs and low consumer confidence in the face of economic uncertainty largely caused by Brexit.
It must now also contend with lenders already nervous given the collapse of the Jamie’s Italian chain in May and restructuring by Carluccio’s and Prezzo last year.
While Pizza Express has a decent stretch of time to find a solution, debt holders may be reluctant given the tough market.
“There are a lot of pizza shops out there. When was the last time you couldn’t find a pizza?” says Brumby. Aside from established chains such as Pizza Hut and Strada, Pizza Express also faces increasing competition from chains such as fast-growing Franco Manca, run by former Pizza Express boss David Page, while US chain MOD pizza is aiming to add to its four outlets this year.
“The value of [Pizza Express’s] assets has diminished by what’s happening on the high street. The only point of reference creditors have got is other operators out there and they have been going bust,” says Brumby. “[Pizza Express] have got a real job on their hands.”
At the same time Pizza Express is having to invest in making restaurants more exciting, making space for live music and other events, to tempt out diners who prefer to order and eat from their sofas. Pizza Express may sell those takeaways, but they are a lot less profitable than dinner for two in a restaurant with a bottle of wine and dessert on the menu.
