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NPC International could sell Pizza Hut restaurants to other concepts

The operator, battling with its franchisor in court over sale procedures, wants to open the process up to anyone, even other concepts, says RB’s The Bottom Line.
NPC International Bankruptcy

The Bottom Line

NPC International, the largest franchisee of Wendy’s and Pizza Hut that is working its way through bankruptcy, is battling with its franchisor in court over procedures for an upcoming auction on the company.

Pizza Hut, specifically, wants more say in who gets to buy the approximately 900 units of its chain that NPC plans to sell in this process, for at least $325 million. NPC thinks that approval could take too long and that it is involving the franchisor, in any event. Both argue that the others’ respective positions could “chill” the bidding process.

But then, in one court document, NPC says this:

“The Pizza Hut franchisor further presumes that a sale of [NPC’s] Pizza Hut assets for continued Pizza Hut operations is the only probable outcome of the Pizza Hut sale transaction,” it says. The company has “built a process that allows for different outcomes, including the sale of leases with the potential for the operation of other businesses going forward.”

In other words, NPC wants to open up the process to anyone, and not just operators of Pizza Hut units, which means that it could conceivably sell to the operator of, say, Domino’s or Little Caesars or Papa John’s. All of them are in expansion mode.

And just to be clear on this point, another bankruptcy filing to support that idea featured a particularly notable story in the history of Pizza Hut parent company Yum Brands—the sale of KFC locations in the Minneapolis market to rival Popeyes Louisiana Kitchen.

That sale was approved in 2012 during the bankruptcy proceedings of Wagstaff Minnesota, one of the chain’s largest franchisees at the time. A particularly frustrated judge approved the sale of the restaurants to Popeyes, even though a KFC operator with the backing of Yum was apparently bidding more. GE Capital, the now-defunct financier that was the Wagstaff lender, backed the lower-valued deal with Popeyes because it did not trust KFC to provide the promised financing.

“Over the last several months of this case I have seen nothing but, it’s not obstreperous conduct but it’s conduct that does not appear, shall we say, in the spirit of negotiating,” U.S. Bankruptcy Court Judge Nancy Dreher said, speaking to an attorney from Yum Brands. “And that’s the only way we get anything done in Chapter 11. So the court comes to this hearing with some real concern about your good faith.”

Dreher also called the case “pathetic” and noted that it was “one of those cases that give the bankruptcy process a lousy and poor reputation.”

Popeyes ended up buying the locations, converted them and sold them to a franchisee, giving the brand a presence in the Minneapolis area that it didn’t previously have.

It’s rare for franchisees to be sold to brands other than the ones they operate, because they are typically worth more if they keep their existing brand. It can cost a lot of money, after all, to rebrand locations.

But it’s not entirely unheard of, as the Wagstaff example demonstrates. And when a franchisor requires extensive remodeling of existing locations, as Pizza Hut does, that could reduce the potential gap in value between an existing operator and someone that would convert the units.

NPC’s lenders want to maximize the value of the restaurants that get sold, so lenders can recoup as much of the $900 million in debt the company had going into the bankruptcy process. So the company has devised a strategy it says could provide for a number of potential bidders, including someone that would buy the entire company.

Not surprisingly, NPC would like to open the process up to anyone, even someone that wouldn’t run the restaurants as Pizza Huts.

That would be a massive blow to the chain, though it’s unclear whether these units would make sense for any of the major pizza competitors with the financial wherewithal to buy them. But some of these other brands could certainly take out major parts of Pizza Hut, especially if they are in areas where those respective companies would like to grow, and the locations are good.

NPC operates 1,200 Pizza Hut units but can close up to 300 of them and has been doing so. The remaining 900 locations are still 12% of the system, a major chunk of the company. Perhaps a company like, say, Papa John’s opts to acquire the locations to convert most if not all of them, potentially bolstering the chain’s unit count by nearly 30%.

It remains to be seen what happens, as a judge must still approve the bidding procedures. But if NPC gets its way, the best solution for Pizza Hut may be to buy the restaurants itself to protect the locations.

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