Chuck E. Cheese faced more than 50 landlord lawsuits

CEC Entertainment said it filed for bankruptcy protection to stop those actions. RB’s The Bottom Line explains why this might be a sign of things to come.
Photo courtesy of Chuck E. Cheese
Bottom Line

CEC Entertainment, the parent company of Chuck E. Cheese and Peter Piper Pizza, declared bankruptcy this week, and unsurprisingly blamed the pandemic for doing so.

“In ordinary times,” James Howell, the company’s CFO said in a legal filing, “the company would be financially sound.”

But it was the need to protect locations threatened by mounting lawsuits from landlords that led the Irving, Tex.-based company to actually take the debt protection route. And it’s a situation that could play out with other chains later this summer.

In a legal filing on Friday, CEC said it faced more than 50 lawsuits from landlords over missed rent payments or efforts to terminate the lease altogether. Howell in his statement with the court said that it declared bankruptcy to stop such moves.

CEC “could not risk losing any additional stores and believed filing these Chapter 11 cases was necessary to, among other reasons, stop these actions,” Howell said.

CEC is hopeful for a sale and has multiple potential buyers. By declaring bankruptcy, it can protect its store base to ensure that it remains a valuable entity for any potential buyer.

We’ve noted several times that lease negotiations remain one of the biggest issues in the near future with restaurant companies. As the summer goes, more back rent comes due, and landlords are going to want to collect it, or they’re going to want to rent their spaces to someone else.

Restaurants, however, may not be ready to pay. A lot of casual and family dining concepts haven’t come close to recovering their full sales. And now some 11 states have paused reopening plans and concerns are mounting that aggressive reopenings of dine-in service have contributed to a resurgence of the coronavirus.

All of that could contribute to an environment in which struggling chains end up in difficult negotiations with landlords that land them in bankruptcy court. Aziz Hashim, founder of Ruby Tuesday owner NRD Capital, expects a “bloodbath.”

To be sure, it’s important to remember that CEC operated with a lot of debt, nearly $1 billion worth. That debt was a burden, and it put pressure on the company’s restaurants to keep sales strong.

Chuck E. Cheese has 612 locations, 97 of which are owned by franchisees. Peter Piper has 129, 89 of which are franchised.

The company took numerous steps to generate sales during the pandemic, notably the creation of the virtual brand Pasqually’s outside of Chuck E. Cheese locations. Yet it lost 90% of its revenue during that period.

Still, Howell said, “those efforts could not compensate for the impact of the pandemic.”

The company’s restaurants have been slow to reopen even as states have allowed in-restaurant dining. Even today, just about a third of the company’s restaurants are open. There are big questions when they will be fully operational again.

Cut 90% of revenue from an otherwise profitable restaurant company with a ton of debt and, well, you have problems.

The company has received “multiple transaction proposals and expressions of interest” from potential buyers, including existing bondholders and “unsolicited expressions of interest from third parties.”

Such expressions mean that a sale of CEC from Apollo to another investment group is inevitable. Apollo has been looking to exit this investment for some time. It had a deal last year to merge with a blank check company, Leo Holdings. That deal fell through.

CEC, much like almost every other restaurant company in the U.S., worked with its landlords to get a break on rent while the coronavirus hammered revenues. The company said it either received temporary relief or simply opted not to make lease payments.

Over time, some landlords “were no longer willing to provide interim relief or negotiate with” the company. And then the lawsuits came over the missed payments.

Typically, restaurants file for bankruptcy to close unprofitable units and get out from under their leases while they negotiate a sale. In this case, apparently, CEC is filing for bankruptcy so it can keep some of these restaurants open and get sold.

But the pandemic has changed a lot of things. Bankruptcy is no different.

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