JP Morgan provided Chinese private equity fund Hony with advice on its first foray into the UK market and a financing package that did not rely on Chinese banks, to become preferred bidder for the Pizza Express restaurant chain.

Overseas Chinese investment continues to grow, but the nature of the deals has been evolving. Once it was mainly state-owned enterprises picking up energy and resources assets. Today, we are seeing financial sponsors investing in Western brands. When Hony Capital bought the UK’s Pizza Express restaurant chain, JPMorgan was its sole financial advisor and lead left bookrunner on the accompanying high-yield bond issue.

“We’ve seen Chinese companies buying assets overseas at record highs this year and Asia is incredibly relevant to our clients around the world” says Hernan Cristerna, JPMorgan’s co-head of global mergers and acquisitions (M&A). “Understanding how a Chinese company thinks about returns and valuations, and how the decision-making process works, is invaluable as they become bigger players in the global M&A market.”

The Pizza Express transaction, and the way it was financed, reflects a new level of sophistication in outbound Chinese investment. Beijing-based Hony is a private equity house backed by Legend Holdings, which in turn owns Lenovo, the Chinese computer manufacturer. Hony manages assets worth nearly $7bn across seven funds and, according to alternative funds research company Preqin, is one of the top three China-based private equity firms by funds raised in the past decade.

Hony’s main business has been investing domestically in state-owned enterprises and helping to restructure them. It began investing abroad in 2008, when it partnered with Zoomlion (a Chinese maker of construction equipment) and others to buy CIFA, an Italian equipment maker. Other sectors it has targeted include hotels and health care and, in one of its more enterprising ventures, it has teamed up with US buyout firm TPG Capital to create a new Hollywood film studio. Its most recent vehicle raised $3.5bn to invest and international investors in its funds include Goldman Sachs and the Bill & Melinda Gates Foundation. 

“We know Hony well,” says Brian Gu, JPMorgan’s co-head of investment banking for China. “Its area of interest is fairly broad, and it has a mandate to invest outside China provided there is a Chinese angle. We have talked to Hony regularly about European opportunities, particularly in the consumer and retail sectors.”

The Chinese connection

One opportunity revolved around Gondola, which owned a number of so-called 'casual dining' chains in the UK – Pizza Express, Ask and Zizzi. Gondola is itself owned by Cinven, the buyout group, which had considered but failed to achieve a sale for the whole dining business. So it was now looking at a separate sale of Pizza Express, running a dual-track process in which both an initial public offering (IPO) and a trade sale were parallel possibilities.

Pizza Express is a household name in the UK, where it has 436 outlets, with another 68 internationally. Crucially, 22 of these are in China, with 12 in Hong Kong, nine in Shanghai and, most recently, one in Beijing. “We had discussions with Hony about looking at Pizza Express, and it confirmed that it had a lot of potential locally,” says Camillo Greco, JPMorgan’s head of consumer M&A for Europe, Middle East and Africa. “The Pizza Express management already felt that their most attractive opportunity was expansion into Asia.”

There are other Italian restaurants in China, but nothing quite like Pizza Express. Chinese consumers appreciate the quality and consistency of the product, by all accounts, and they like being able to see the oven and watch the pizzas being made in front of them.

Other UK and Chinese funds were running their slide rules over Pizza Express, including, reportedly, Citic Private Equity. “Hony’s operation is predominantly based in greater China, and it looked to us for a better understanding and experience of the UK market,” says Mr Gu. “JPMorgan helped Hony to better understand UK customs and contracts, and played a role in showing Hony’s credibility.”

Complete package

When JPMorgan pitched for the mandate to advise Hony in May, it put forward a complete package, including M&A and financing. That underpinned the offer made to Gondola. The IPO remained an alternative, but a trade sale offered the vendors a quick, clean exit. Selling to a Chinese private equity firm also demonstrated its ability to identify pockets of capital outside Europe and to interact with Asia.

“Both management and Hony felt that China was the place for Pizza Express to be,” says Mr Greco. “Management was convinced that Hony offered advantages that others did not bring to the table – like an ability to negotiate for retail space in China in a way that they couldn’t.”

The deal was announced in the second week of July, with a price tag of £873m ($1.43bn). Hony used a UK-style bridge and then refinanced in the capital markets, achieving high leverage without relying on its domestic banks. The JPMorgan team, with Deutsche Bank and Goldman Sachs (which advised Cinven) as joint leads, moved swiftly to execute a high-yield bond issue that would finance 70% of the purchase price.

“One notable feature of the acquisition was that it was signed on July 12 and we priced the bonds less than two weeks later,” says David Shaw, a managing director in JPMorgan’s leveraged finance group. “We completed the documentation process, drafted the offering memorandum, dealt with the rating agencies and marketed the bonds all in a very compressed time frame.”

This was not the easiest time to be marketing a high-yield debut. Europe and the US were seeing big outflows from high-yield funds as investors had second thoughts about the riskiness of the asset class.

Pizza Express came to the market looking for £610m, with Hony putting up the rest of the purchase price in equity. That was a big deal for a debut issuer, particularly in the sterling market, and the transaction was divided into two tranches – £410m of senior secured notes and £200m of senior notes. “There is greater liquidity for senior secured paper than for unsecured, and it’s cheaper,” says Mr Shaw. “So we went for the split we felt offered the best liquidity and the best pricing.”

The proof’s in the eating

A roadshow was organised, but demand was so strong that this was shortened. “Clearly, everyone knows the Pizza Express business,” says Mr Shaw. “Many investors said they go there regularly, often with their children, which made the deal easier to market.”

Hony, however, was a relatively unknown entity and this was the first bond deal it had taken to the European market. The business was also going to be highly leveraged. So investors wanted to know more about Hony and Legend, and what they intended to do with the new capital.

There were relatively few restaurant businesses with outstanding bonds to act as pricing comparables, so the bankers looked at the broader sterling high yield market for companies with similar credit standing. The deal was finally launched with price talk of 6.75% area for the seven-year secured tranche and 8.75% area for the eight-year unsecured. Both were tightened to print at 6.625% and 8.625% respectively. Leverage was 4.3 times through the senior secured and 6.5 times through the senior notes.

“The book was very strong, with multiple oversubscription on both tranches,” says Mr Shaw. He adds that there was a particularly high proportion of quality investors – core long-only investors and pure high-yield funds.

The deal demonstrated the ability of a Chinese sponsor to compete for and successfully close a billion-dollar deal in Europe, Mr Gu maintains. “From a funding perspective, it was the first time that a Chinese sponsor executed a transaction using only overseas capital markets, not Chinese banks,” he says.

“Chinese players are learning quickly and getting more sophisticated. We are going to see a lot more sponsors and corporates investing in the UK and Europe, in all sectors.”


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