Pizza Express Suffocates Under a Mountain of Debt

Pizza Express is the latest restaurant chain to hit the headlines as its financial woes reach boiling point.

The company is saddled with a mountain of debt – debt that is eating their profits and leaving the business technically insolvent.

And now the latest news is that the company is hiring financial advisers to help negotiate a deal with its creditors.

The story of Pizza Express’s plight is similar to many of its contemporaries: a leveraged buyout leaves the company with a large debt servicing bill every year, and when consumer habits change and the operating environment becomes more challenging, the business struggles to make repayments and is at the mercy of its creditors.

In this article we’re going to take a look at issues facing Pizza Express, what caused them and perhaps most importantly what happens next.

Modest Profits, High Debts

Pizza Express has been operating with large debts for over a decade. However, they began to spiral out of control in 2014 when the company was acquired by Hony, a Chinese private equity firm.

Hony paid a premium for the chain, loading Pizza Express with large debt repayments. Since then, the company’s debt has grown to £1.12bn and the business is making significant pre-tax losses – this is unsustainable and will require a restructuring of the business.

Pizza Express is still making a profit before interest payments are deducted, but as you can see in the table below the interest payments push the business into a loss. With profit before interest reducing, the interest payments are ramping up making for a profit after interest gap that is increasing at an alarming rate.

The Dining Bubble

So why did Hony pay a premium for a business that was struggling?

Over the last decade, the casual dining sector has been a prime target for private equity buyouts.

Restaurant chains were seen as a good investment – people were dining out more, and a well-known restaurant brand was seen as a big opportunity to grow and sell off for a profit.

The model of taking a concept that worked and opening more locations across the country appealed to investors who believed that streamlined operations would provide exciting economies of scale and fast growth.

Unfortunately, this created a bubble which saturated the casual dining sector and led to greater competition and ever tighter profit margins.

Now, with consumer confidence hit by Brexit, casual dining having peaked and restaurants needing to discount prices to compete in an overcrowded sector, the bubble has burst. Jamie’s Italian has already gone bust, while Byron, Carluccio’s, Strada and Prezzo are also facing difficulties.

According to the Financial Times, last year was the first in nine years that the number of restaurants in the UK fell, rather than increased.

Red Flag Alert’s Q3 data reports that the number of restaurants in significant distress is 2% higher in Q3 2019 than Q3 2018, while over the same period the number of restaurants in critical distress spiked by 14%.