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Pizza Hut’s parent company unlikely to buy out NPC International

Yum Brands executives commit to the “asset-light” model as they push for a resolution involving the big operator, says RB’s The Bottom Line.
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Bottom line

Yum Brands doesn’t appear all that eager to buy units from the bankrupt operator of a large number of its Pizza Hut locations.

Speaking on the company’s second-quarter earnings call on Thursday, CEO David Gibbs stressed that it is “committed to the asset-light model,” there are plenty of interested prospective franchisees and it shouldn’t start buying out operators’ restaurants.

“We never rule out any possibility,” Gibbs said, emphasizing that he wouldn’t comment specifically about NPC. “But there’s plenty of interest in getting into all of our different businesses around the world as investors have seen how resilient our business is.”

NPC is Pizza Hut’s biggest franchisee, operating about one out of every six of the chain’s locations. The company nearly filed for bankruptcy in January before ultimately seeking out debt protection earlier this month.

NPC, which is also Wendy’s largest franchisee, had a massive amount of debt, more than $900 million. Much of that debt was from a 2018 leveraged buyout by investment firms Delaware Holdings and Eldridge Industries.

Court documents suggested strongly that relations between the company and Pizza Hut had soured, with discussions between the companies having failed to come to an agreement and Yum declaring NPC ineligible for various coronavirus-related breaks.

NPC appears likely to be split in two, with the Wendy’s locations going one way, and the Pizza Huts going the other.

On Thursday, Gibbs said the company is “working productively.” He also noted that there is considerable interest in those locations.

“There’s a lot of interest in that business,” he said. “We expect it to be in the hands of a capable franchisee coming out of this process.”

One likely outcome of the NPC bankruptcy, not to mention the coronavirus in general, is that it could make franchisors more cognizant of their franchisees’ debt levels in coming years.

Franchisees borrowed massive amounts of money to purchase restaurants and expand and remodel. Aggressive lenders made increasingly risky loans, and buyout firms started eyeing the largest companies, adding even more leverage to the mix.

The risk of letting such large-scale operators take on so much debt came into full view in the Pizza Hut-NPC situation. NPC’s debt levels made it difficult to remodel older units, especially the chain’s legacy dine-in locations, which hurt the chain’s overall results.

But Pizza Hut’s own sales challenges in recent years hurt NPC’s sales, which made it more difficult to remodel those locations.

Yum executives made it clear that they want the new owner to have a better capital structure. The financing markets will probably force the issue, anyway.

“This was an expected development,” CFO Chris Turner said. “Ultimately, we will support an outcome that results in a lower, more sustainable level of debt, a higher focus on operational excellence and a greater level of investment for the restaurants in the NPC system.”

Turner also hinted that not every issue will be negotiated, and the bankruptcy court may play a role in determining what happens.

“We expect there will be some issues we can resolve with NPC and related parties directly and others that will require briefings and court rulings,” Turner said.

As for Yum’s asset-light model, it did gain a little bit of weight more recently, following its acquisition of Habit Burger, which operates more than 200 corporate units. It also revealed that it is building a couple of Taco Bell equity locations.

It will continue to build more corporate Habits before “slowly” opening the chain up to more franchising.

But it clearly has no real intent to take on those Pizza Huts.

“Our model is for franchisees to do the development,” Gibbs said.

UPDATE: This story has been updated to correct the name of Eldridge Industries.

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