Beijing-based private equity firm Hony Capital has agreed to buy British restaurant chain PizzaExpress for about £900 million ($1.54 billion), the latest example of China’s appetite for iconic western brand names.
Hony bought PizzaExpress from London-based private equity fund Cinven, which had taken the restaurant chain private in 2007 for €1.34 billion ($1.77 billion).
China’s rapidly expanding middle class is demanding higher-quality, safer and a wider variety of foods. Other Chinese purchases in recent years include Bright Food’s acquisition of Britain’s Weetabix cereal maker in 2012 and WH Group’s acquisition of pig farmer Smithfield Foods for $4.7 billion in September, the largest Chinese purchase of a US company ever.
Foreign acquisitions in the food sector made up 12% of total Chinese overseas purchases last year, far higher than in 2012 (2.6%) and 2011 (1.3%), according to data provider Dealogic.
PizzaExpress, founded in 1965 in London’s Soho district, has been expanding rapidly in Asia and now operates 12 restaurants in Hong Kong, nine in Shanghai and recently opened up shop in Beijing to cater to this increased demand.China has only 9% of the world’s farmland but its 1.36 billion population consumes about 20% of its food supplies, according to the UN.
According to its interim report PizzaExpress plans a further 200 restaurant openings in the UK and another 200 across key growth markets such as China and India, but it remains predominantly a UK business where it runs 436 restaurants.
“Asia is a key part of our future growth strategy and Hony’s expertise in this region will be invaluable,” said Richard Hodgson, chief executive of PizzaExpress, in a statement on Saturday.
Hony, sponsored by Chinese conglomerate Legend Holdings, said it can help PizzaExpress create more value in China given its domestic network and contacts.
“With PizzaExpress, we have the opportunity to leverage our local expertise to accelerate its growth in the Chinese market, as well as to continue to drive its business forward in the UK,” John Zhao, Hony’s chief executive officer, said in the statement.
Hony is evolving from a Chinese growth capital shop to an international buyout fund looking to help foreign brands expand in China. In March it teamed up with TPG Capital to back a Hollywood studio set up by producers Robert Simonds and Gigi Pritzker, and hopes to help the fledgling studio to market films in China. It has also partnered with NetJets to develop its private jet business in the Chinese market.
The auction was closely contested. Final bids came in just over a week ago. Hony Capital saw off competition from rival fund Citic Capital Partners and the Chinese property-to-insurance conglomerate Fosun also hoping to tap into the growing consumer class in China.
“PizzaExpress is an iconic brand in the UK restaurant sector with a strong and growing international presence. This has been reflected in the considerable interest we received in buying the business and in today’s transaction with Hony,” said Harvey Smyth, Gondola’s CEO.
Meanwhile international firms such as Advent and CVC Capital also showed interest but struggled to see how they could add as much value in international markets, while the UK part of the business was more mature and saturated.
Hony, which has amassed $6.8 billion under management across seven funds since it was founded in 2003 and closed Hony V, LP a $2.4 billion fund in December 2011, still has bandwidth for more deals and is keen on the consumer, food and beverage space. Hony has also shown interest in United Biscuits, the maker of Jaffa Cakes, which is likely to come on the block later this year.
Peking duck pizza please
The deal is the largest ever cross-border LBO by a financial sponsor excluding sovereign wealth funds and was struck at about 10 times PizzaExpress’s historical Ebidta. Over the past seven years, the British firm’s earnings have grown from about £60 million to about £90 million.
The company is unlikely to need significant revamping or capex and cash conversion should be healthy, said a person familiar with the transaction.
Hony is likely to pay for the transaction with about $1 billion of debt and the rest in equity. Hony and its banks are likely to tap the European bank and bond markets to syndicate the loan more widely, according to the person familiar with the deal.
Staff at one of Hong Kong’s busiest PizzaExpress franchises told FinanceAsia they had not heard about the sale from superiors but hoped there would be no cost cuts, staple ingredients would continue to come from Europe and that charitable donations would continue. They said the Peking Duck pizza was a favourite among local Chinese.
The PizzaExpress management team led by Richard Hodgson will remain with the business.
Cinven tried to sell all of Gondola, the parent copany of PizzaExpress, but failed and resorted to selling the holding company piecemeal. Gondola sold UK burger chain Byron Hamburgers to Hutton Collins for £100 million in October.
Gondola also operates other brands such as ASK Italian, Zizzi and Kettner’s. PizzaExpress was the most attractive of Gondola's businesses to Chinese buyers given its international profile.
PizzaExpress is present in 13 international markets.Goldman Sachs advised Gondola while JP Morgan advised Hony on the acquisition and is helping on financing. Linklaters and KPMG also acted for Hony.
