Tue 08/04/2020 06:53 AM
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Pizza Express has received support from its key stakeholders for a balance sheet restructuring and a forthcoming company voluntary arrangement, or CVA. Holders representing more than 75% of the group’s £465 million senior secured notes (SSN) due 2021 and its principal shareholder Hony Capital have agreed a lockup agreement. Additionally, Pizza Express has hired Lazard to solicit bids for the sale of the group, excluding its operations in China.

The lockup agreement waives events of default under both tranches of the group’s notes, including the overdue Aug. 1 interest payment and outstanding financial statements.

Under the group’s five-year business plan, it said it expects EBITDA pre-exceptional items of negative £4.8 million in full-year 2020, with total revenue declining 48.4% to £260.8 million. Pizza Express then said it expects total revenue to rebound in 2021, with like-for-like sales in its U.K. & Ireland sites increasing 90% year over year to £364.2 million, with total sales of £416.3 million. By 2024, total group revenue is expected to be £497.6 million with EBITDA of £95.5 million.

The CVA is expected to save the group around £10 million annually.

In addition to the CVA, the group is intending to use either two Companies Act 2006 Part 26 Schemes of Arrangement or a Part 26A Restructuring Plan (also known as the Super Scheme) if the deal is not fully consensual. If it uses the Restructuring Plan, the group may be able to use the cross-class cramdown mechanism in the tool to force the restructuring plan on the senior unsecured notes (SUN) even if they do not consent to it. The relevant consent thresholds for a CVA, and either :i) a consensual restructuring; or ii) a scheme for each of the SSN and SUN issuer; or iii) a restructuring plan are set out below.

The restructuring transactions involve the following:
  • Resetting U.K. leasehold obligations through a CVA;
  • Extension of the £70 million super senior term loan facility (SSTL) following the completion of the transaction;
  • £144 million of new money, backstopped by more than 75% of the SSN holders;
  • Restructuring of its principal third-party indebtedness, the existing SSNs and the SUNs, involving significant deleveraging and extension of maturities;
  • Transfer of majority ownership of the group to the holders of the SSNs; and
  • The sale of Pizza Express China Ltd., Pizza Express PRD Ltd. and Pizza Express Beijing Ltd. and their respective subsidiaries to an SPV incorporated by Hony Capital.
All of the group’s current equityholders have been offered the opportunity to co-invest in the divested China group, and all SUN holders will also have the option to do so at the closing of the restructuring transaction.

The capital structure, pre and post-restructuring is below:

Note that this assumes that only the £49 million of new money is drawn (tranche A, as described below).

Based on EBITDA of about £95 million that the group expects to generate in 2023 and 2024 and the debt amounts in the chart above, the restructuring plan expects Pizza Express’ gross and net leverage to fall to 3.4x and 2.5x, respectively, on a pro forma basis. Note that this is before the capitalization of any interest payments.

Transaction Overview

The transaction will see total debt decline to £319 million from £735 million. The existing SSNs will be offered the opportunity to participate pro rata to their holdings in the new £130 million facility in exchange for 35% of the equity post-reorganization. The new facility features a £14 million backstop fee and will be split into three tranches, one of which can be used in the event that the £70 million super senior facility requires refinancing.

The new money facility will have a 4.5-year maturity, and 7.5% cash interest, with a PIK toggle to 9% at the company’s discretion for the first two years. The facility includes a tranche A of £49 million (£40 million net of OID and backstop fee), tranche B of £21 million (£20 million net of OID), and tranche C of £74 million (£70 million net of OID).

The SSNs will be exchanged for £200 million of new secured debt with a five-year maturity, and 8% cash interest with a PIK toggle to 9.50% at the company’s discretion for the first two years. The restructuring will see the SSNs own 63% of the post-reorganization equity (before dilution for the management incentive plan).

The SUNs will be converted into 1% of the post-reorganization equity, subject to the requisite majority of noteholders supporting the transaction. Existing shareholders are supporting the transaction and will receive 1% of the post-reorganization equity.

The deal includes the sale of the group’s operations in China to a Hony SPV after signing the lockup agreement. Interim funding will be up to £1 million based on pre-agreed uses in line with the group’s requirements. There is no obligation to make further funding available to the China Group following the disposal.

Upon completion of the China disposal, the U.K. group will release all intercompany claims payable by the China group. The plan is expected to be implemented by Nov. 15.

Houlihan Lokey and Kirkland & Ellis are assisting Pizza Express as financial advisor and legal advisor on the restructuring, respectively. Pizza Express has launched a sale process, being run by Lazard.

Consent Levels

The required consent levels from noteholders and unsecured creditors to implement the transactions are as follows:

If the group uses the Restructuring Plan (or Super Scheme) it may be able to use the cross-class cramdown mechanism in the tool to force the restructuring plan on the SUNs even if they do not consent to it.

M&A Process and Timeline

Pizza Express expects to receive indicative and final bids for its sale process on Aug. 27 and Sept. 24, respectively. Assuming the M&A process is successful, Pizza Express targets signing off on the transaction by Oct. 2.

However, if the M&A process is unsuccessful, a meeting of the classes of creditors to vote on the restructuring plan will be convened on Oct. 21, with the court hearing to sanction the scheme planned for Oct. 28. On Nov. 4, the transaction will become effective either (i) consensually if more than 90% of the SSNs and SUNs approve the transaction; (ii) through a restructuring plan if more than 75% acceptance of the SSNs is achieved; or (iii) through scheme(s) of the relevant issuer if more than 75% acceptance from the SSNs and/or SUNs is achieved.

Covid-19 Impact and 2020 Guidance

From March to June, Covid-19 has forced Pizza Express to close dine-in, delivery, takeaway and click and collect services in the 449 company-owned restaurants in the U.K. and 19 company-owned restaurants in Ireland.

As a result, the group has paused all capex, utilized government support schemes, deferred VAT payments due from March 20 to June 30 until March 31, 2021, is seeking deferral of PAYE and NIC payments due from February to May totaling £5 million, is furloughing all restaurant staff and implementing pay reductions for non-furloughed staff, and withheld rent to the majority of landlords at the end of March and June.

The company said it expects the reopening of the estate to take six to eight weeks following the easing of Covid-19 restrictions on July 4. As of Aug. 4, 152 sites in the U.K. have re-opened, with 14 sites reopening in Ireland. Sales have been ahead of expectations, but have fallen 36.5% in re-opened sites on a like-for-like basis up to July 26.

Year-to-date, second-quarter turnover on a constant currency basis is down 53.3% year over year to £126.2 million, with U.K. & Ireland and international revenue down 57.6% and 37.2% year over year, respectively. EBITDA in the period has declined from £32.4 million to negative £26.5 million year over year. Year-to-date second-quarter U.K. & Ireland operating cash flow was negative £38.8 million, with levered free cash flow at negative £47 million.

Net debt stands at £708.9 million, including the £465 million SSNs, £200 million SUNs, £19.6 million of accrued interest, and £70 million HPS facility, less £46.6 million of cash.

Site numbers have declined to 468 in the U.K. and Ireland on June 30 from 481 on Dec. 31.

For 2020, the company said it expects negative £4.8 million of EBITDA (excluding the China), before exceptional costs, driven by Covid-19. Including exceptional items related to the group’s CVA, restructuring and restart, EBITDA is expected to be negative £43.3 million. Pizza Express said it expects 85% of 2019 capacity by the end of financial year 2020. A pro forma profit and loss and operating cash flow forecast is below:

Five-Year Business Plan

The group’s five-year business plan is focused on a smaller physical estate, refining FutureExpress, its omnichannel growth strategy, improving pricing and promotions, streamlining the operating model and reviewing restaurant formats and reducing opex.

FutureExpress will see a full refurbishment of stores, with the company noting positive early results with respect to like-for-like sales customer interaction. Over the next three years, the company said it expects capex related to FutureExpress will be £45 million across its 320 sites and expects the program to generate £11.5 million of additional EBITDA by 2023. Average capex per site will be between £140,000 and £220,000.

The business plan is predicated on recovery of trading across the second half of 2020 and the first half of 2021, with a return to near pre-Covid-19 levels by the second half of 2021. A summary of key financials is below:

China Disposal

The sale of the China group to a Hony SPV for a de minimis consideration will occur soon after the signing of the lock-up agreement.

There will be interim funding of up to £1 million based on pre-agreed uses in line with the China group’s requirements and such amount represents the approximate cost for the U.K. group of a China group bankruptcy.

There will be no obligation for the U.K. group to make any further funding available to the China group following completion of the China disposal.

In terms of intellectual property, the “Marzano” word marks (subject to limited exceptions) and domain name registrations (including applications) are the relevant assets in Mainland China. There will be a five-year, royalty-free license for the China group to use the Pizza Express and Pizza Marzano “roundel” devices and otherwise grant a perpetual, exclusive, royalty-free license for the China group to use all other Marzano IP used by the China group in Mainland China.

The remaining group will have a right of first refusal to purchase back the IP that is being transferred to the China group, if the China group decides to sell such IP. The China group will have the right of first offer to purchase any “PizzaMarzano” or “Marzano” IP that the U.K. group intends to sell to a third party.


It is a condition precedent to the restructuring transaction (including the new money injection) that a CVA is approved. Therefore, the transaction will only complete if the CVA is approved.

The company has classified the sites portfolio into nine categories based on financial viability and strategic importance:
  • A1 and A2: Highest performing sites and those with strategic importance;
  • B1, B2, B3: Sites where a rent reduction is required to be commercially viable;
  • C: Sites that, even with a rent reduction, are still not commercially viable;
  • Sublets: Sites that the company has sub-let to third parties;
  • Voids: Sites where the lease is void; and
  • Other, including sites where leases have terminated, or notice has been served to terminate.
The CVA is expected to save the group around £10 million annually.
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