Pizza Hut UK hunts buyer amid Budget tax hike crisis

Pizza Hut's biggest UK franchisee has begun approaching potential bidders as it scrambles to mitigate the looming impact of tax hikes announced in last month's Budget.

Sky News has learnt that Heart With Smart (HWS), which operates roughly 140 Pizza Hut dine-in restaurants, has instructed advisers to find a buyer or raise tens of millions of pounds in external funding.

City sources said this weekend that the process, which is being handled by Interpath Advisory, had got under way in recent days and was expected to result in a transaction taking place in the next few months.

HWS, which was previously called Pizza Hut Restaurants, employs about 3,000 people, making it one of the most significant businesses in Britain's casual dining industry.

It is owned by a combination of Pricoa and the company's management, led by chief executive Jens Hofma.

They led a management buyout reportedly worth £100m in 2018, with the business having previously owned by Rutland Partners, a private equity firm.

One source suggested that as well as the talks with external third parties, it remained possible that a financing solution could be reached with its existing backers.

HWS licenses the Pizza Hut name from Yum! Brands, the American food giant which also owns KFC.

Insiders suggested that the increases to the national living wage and employers' national insurance contributions (NICs) unveiled by Rachel Reeves would add approximately £4m to HWS's annual costs - equivalent to more than half of last year's earnings before interest, tax, depreciation and amortisation.

One added that the Pizza Hut restaurants' operation needed additional funding to mitigate the impact of the Budget and put the business on a sustainable financial footing.

The consequences of a failure to find a buyer or new investment were unclear on Saturday, although the emergence of the process comes amid increasingly bleak warnings from across the hospitality industry.

Last weekend, Sky News revealed that a letter co-ordinated by the trade body UK Hospitality and signed by scores of industry chiefs - including Mr Hofma - told the chancellor that left unaddressed, her Budget tax hikes would result in job losses and business closures within a year.

It also said that the scope for pubs and restaurants to pass on the tax rises in the form of higher prices was limited because of weaker consumer spending power.

That was followed by a similar letter drafted by the British Retail Consortium this week which also warned of rising unemployment across the industry, underlining the Budget backlash from large swathes of the UK economy.

Even before the Budget, hospitality operators were feeling significant pressure, with TGI Fridays collapsing into administration before being sold to a consortium of Breal Capital and Calveton.

Sky News recently revealed that Pizza Express had hired investment bankers to advise on a debt refinancing.

HWS operates all of Pizza Hut's dine-in restaurants in Britain, but has no involvement with its large number of delivery outlets, which are run by individual franchisees.

Accounts filed at Companies House for HWS4 for the period from 5 December 2022 to 3 December 2023 show that it completed a restructuring of its debt under which its lenders agreed to suspend repayments of some of its borrowings until November next year.

The terms of the same facilities were also extended to September 2027, while it also signed a new 10-year Pizza Hut franchise agreement with Yum Brands which expires in 2032.

"Whilst market conditions have improved noticeably since 2022, consumers remain challenged by higher-than-average levels of inflation, high mortgage costs and slow growth in the economy," the accounts said.

It added: "The costs of business remain challenging."

Pizza Hut opened its first UK restaurant in the early 1970s and expanded rapidly over the following 15 years.

In 2020, the company announced that it was closing dozens of restaurants, with the loss of hundreds of jobs, through a company voluntary arrangement (CVA).

At that time, it operated more than 240 sites across the UK.

Mr Hofma and Interpath both declined to comment.

(c) Sky News 2024: Pizza Hut UK hunts buyer amid Budget tax hike crisis