Pizza Hut sold for $2.7B: Full breakdown

[00:00:00]Welcome back and live now from Fox. I'm your host Anna Marc. Pizza Hut has been a staple for decades, but some news came out this week. Take a look at that post from Reuters. Yum Brands announced it is going to sell Pizza Hut for $2.7 billion, splitting that deal between Yum China Holdings and private equity firm Long Range Capital. So, this deal is worth about $2.7 billion total. Joining us right now to break down what this means for the brand, we are joined by Bloomberg restaurant analyst Michael Halen. Thanks so much for joining us here live now from Fox.

[00:00:35]>> Okay, >> thanks for having me.

[00:00:36]>> Yeah, so first things first, let's just break down this deal. Uh who are these companies that are buying Pizza Hut?

[00:00:44]>> Yeah, so the Chinese business is going to be bought by Young China, which is publicly traded uh out there in China.

[00:00:50]Has been, you know, Young Brand's largest franchisee for for quite some time. they were partnered in those restaurants with Young Brand. So, this made perfect sense. Uh Long Range is, you know, a private equity fund. They've uh don't have a ton of experience in restaurants, but um they clearly see an opportunity to turn around Pizza Hut, which, you know, has been, you know, a a tough go for for Young Brands for the last, you know, decade plus.

[00:01:20]>> And Young Brands has of course owned Pizza Hut for a while now. So, why did they decide that now was the right time to sell it?

[00:01:27]>> Well, it was really the new management team. You know, a new CEO came in, uh, Chris Turner, and he's just more aggressive, I think, than his predecessor, right? And so they're not wasting any time to kind of reimage Young Brands. And and this was a key piece of the puzzle because it really gives their management team and their executive team, which is known to be as good as there is in the restaurant industry, a chance to focus on its primary growth drivers, which are Taco Bell, which is an absolute monster uh in the US and and around the globe, and KFC, which is very strong internationally.

[00:02:03]>> How exactly is this Pizza Hut deal being structured?

[00:02:08]Yeah. So, this is going to be uh a cash deal. It being private equity, I assume they're going to um borrow and and lever uh this business up. Um yeah, like I said, they must see some something here.

[00:02:23]Um but the pizza industry, especially in the United States, is very very competitive and Pizza Hut has had a really tough 15 plus years. Um, you know, Domino's turned around their business in in 2010, and since then they've been taking share, you know, quarter after quarter, year after year, and it's really taken a chunk out of Pizza Hut's business.

[00:02:46]>> You know, Pizza Hut before they had those buildings that were kind of shaped like the Hut, and they had the all you can eat pizza with the salad. Uh, do you think when they strayed away from that that business kind of declined a little bit? Are we going to see a comeback maybe of those buildings?

[00:03:01]You know, I think the buildings are tough because people want their pizza delivered fast and easy and and Pizza Hut was trying to convince their franchises to open more of these smaller uh delivery only stores because they make a lot more money, right? They they're cheaper to build. Uh the payback period is much shorter. Uh and they have a stronger returns on investment, right?

[00:03:23]I I in my opinion that real estate has kind of been a yoke on its neck uh for quite some time. I'd say the other reason why, you know, this chain has struggled was in the US anyway has really been the quality, right? That we've we've seen a degradation in the quality over the years. Um the pizza market has become way more competitive uh over the last 15 20 years, not only from the likes of of Domino's and Papa John's, but also all the local mom and pop shops and all the brick oven and wood woodf fired oven pizza uh joints that we see cropping up everywhere. So, it's it's definitely a a tough business.

[00:04:00]And then, you know, they're impacted by this K-shaped recovery. A lot of their uh customers here in the US are low and middle inome consumers, right? And and inflation impacts those segments uh of the consumer much much harder than highincome consumers. And that crimps their spending. And, you know, they're more likely to buy a frozen pizza at the grocery store than than order Pizza Hut when times are tough. Why do you think the sales being separated between China and all the other uh buildings?

[00:04:32]>> Yeah, I I think the real reason why is that Young Brands wanted Young China to own the China business. So I in my opinion that part of the deal happened first and from there Young Brands most likely was on the search for someone to buy the US and the European business and um and you know the entire international business exchina. So that's why I think it it was split into two buyers because you know young China is is focused on that country and they're not interested in buying other international markets or the US.

[00:05:06]>> What does this mean for consumers going forward? Do you think that there are going to be significant can changes maybe in the menu or how things are operated?

[00:05:15]>> You know, I what I think is is that um quality will improve. That's that's the way I would approach it. I would try to improve the quality because that's how Domino's took share from Pizza Hut.

[00:05:27]Pizza Hut was number one in 20 n 2009 2010 and Domino's revamped their pizza and that started off their very strong run. So if I was running Pizza Hut, I'd be very focused on the quality of the food. Once you can get people back in the stores, then you could do more um you know, unique and limited time offers and unique offerings and you can kind of play with the menu a little bit. um they got to get the marketing right, right?

[00:05:58]And then once they can get sales to come back, you know, from there, you know, it's about convincing the franchises to open more stores. And I'd have to assume it would be these smaller delivery and takeout only stores.

[00:06:11]>> Are there any other people or I guess companies in the pizza game that are kind of giving Domino's a run for their money? Are they still like the clear frontr runner?

[00:06:20]Yeah, Domino's is has been on an absolute tear uh for, you know, I guess it's like about 16 17 years now. Um, you know, Papa John's has done well here in the US in fits and starts. Um, you know, they're they're struggling a bit uh strugg struggling a lot right now and Papa Pizza Hut has been struggling for for quite some time. It's really been the regional players um as well as as the independents. The local mom and pop shops have done uh you know a nice job like they've they've increased the qual you know the competition by increasing the quality providing better quality uh for consumers.

[00:07:04]>> Just looking at that $2.7 billion price tag does that tell us anything about maybe the strength of the current company?

[00:07:11]>> Yeah because the chain is huge. So, you know, you know, you could probably quibble if you want to, you know, quibble about this deal. You're saying, "Well, they're not really getting a whole lot for Pizza Hut." But the, you know, to me, it's really about just getting it off the books. They're going to take 2.3 million, three 2.3 billion after tax. They're going to use it to buy back shares. They'll be able to buy back about 6% of the float, right? and and the market's going to give them a higher multiple in the market because they're going to grow the top line and they're going to grow the bottom line a lot faster without Pizza Hut. So, to me is really addition by subtraction.

[00:07:49]>> Now, looking ahead, let's say five years, what do you think Pizza Hut's operations are going to look like?

[00:07:55]>> Oh, uh yeah, it it's tough to say. this business is the restaurant business is tough especially in the midst of a commodity bull market where low-income consumers are getting squeezed but you know I I would I would expect that long range capital management is going to be looking to you know improve the quality open more of these smaller delivery and pickup only stores trying to close um these big red roof restaurants because they are not doing the the volume to justify the the large rents that they pay. You know, back in the 80s, Pizza Hut was a monster. It was a place to be.

[00:08:32]People were going there and um you could justify paying those high rents, right?

[00:08:37]But they they are located in some some solid high rent places that you know, you just can't justify paying those rents anymore. So, >> yeah. Earlier this week in our newsroom when we heard this news, we were talking about how some of those favorites that we had when we were kids, like Cece's Pizza and Hometown FA, like they've all closed down. Is it because that same reason where it's just you can't justify paying the high rent and stay afloat?

[00:09:01]>> Yeah, that listen, that's part of it.

[00:09:02]I'd say that's more of a story for the last, you know, handful of years. Um, but just the restaurant business is so competitive, right? There's competition from everywhere. Not just in the restaurant industry from other national players, but then regional players, then local mom and pop shops, from the grocery store, right? You have restaurants basically in the store now and deli counters that are trying to take um share. Um you know, people are making food right out of their own kitchens and selling it in urban areas.

[00:09:35]Food trucks are all over the place. Like this is a very very competitive industry with competitors cropping up every day.

[00:09:44]Um, it just makes it makes it really difficult, you know, and some of these chains do have an advantage. Like Pizza Hut does have an advantage with its scale, with its size. It can offer prices that a lot of the smaller competitors can't match, but they have to sell a product that people want.

[00:09:59]>> Anything else about this Pizza Hut deal that uh we haven't talked about that you might want to touch on before I let you go?

[00:10:05]>> Um, you know, I would just emphasize the point that Young Brands is a very well-run company. their Taco Bell especially, but Young Brands as well is known for being an incubator of great talent. Um, you know, and and with this faster top and bottom line growth, you know, we expect this stock to get a a better multiple in the market.

[00:10:27]>> All right, Michael Halen with Bloomberg.

[00:10:28]Thanks so much. We appreciate you here on Live Now from Fox.

[00:10:32]>> Sure thing.

[00:10:32]>> All right, it's time for us here on live now from Fox to slide away for a quick two-minute commercial break. We'll be right back with much more for you on the other side. I'm your host, Anna Marc.

[00:10:39]Stay close. for back and two.