Hony Capital Ltd, the private equity arm of the Lenovo Group, announced earlier this week the acquisition of Pizza Express, a very well known and established restaurant chain based in the United Kingdom.  This was a very bold move and somewhat unexpected.  The final purchase price was somewhere in the vicinity of 10x current EBITDA.  The key question is whether the transaction will work at that purchase price.  Here are a few brief observations.

Pizza Express   Pizza Express is well established, profitable but tired from a consumer standpoint.  The brand is over 40 years old and restaurant lives tend to be short and difficult to prolong.  As consumer taste changes so must the restaurant design and menu offerings. Failure to refresh the concept every 5 years or so and you start to die slowly and lose the customer a little bit over time.  Growing the concept in the UK from this base and keeping it relevant is not a simple task.

Despite over 40 years in business, the brand has failed to really resonate with any scale overseas, generally due to the employment of a master franchise development model and the plethora of Italian concepts in every country.  Building a business of scale overseas will take some risk capital and most likely not achieve a reasonable payback during the typical private equity holding period.

China and India are a big part of the growth story.  But Pizza Express is positioned in the upper casual dining category in these markets. Are they going to change the positioning to drive scalability?  A risky strategy but probably necessary.

We certainly hope that Hony Capital succeeds with this investment but the purchase price suggests a narrow margin for error.


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