Private equity fails Eagle Boys
Directors of the debt ridden and fractured chain called in SV Partners as voluntary administrators on July 14 after nine years under private equity control.
The failure of the Eagle Boys chain is reminiscent of Pacific Equity Partners’ attempts to run franchise business models with the Angus & Robertson bookstore chains and the vacuum cleaning specialist chain, Godfreys.
As with Godfreys, NBC Capital faced numerous disputes with franchisees during its period of ownership of Eagle Boys.
The private equity firm, which had an 85 per cent majority shareholding in Eagle Boys Pizza, had acquired the chain in 2007 from its founder, Tom Potter, with the intention of taking a large slice of profit in a float on the Australian Stock Exchange.
The usual timeframe for a private equity investment is around five years, but NBC Capital was forced to stick with the business for four further years with its prospects of a float flattened by poor profitability and a declining store network.
At its peak, before NBC Capital bought in to the business, Eagle Boys Pizza had around 340 stores and was the third largest chain in the take away pizza category.
Three years ago, the company mapped out a plan for international expansion, starting with the Middle East.
However, when the administrators were called in this month, there were just 114 standalones franchise stores and 12 Hoyts Cinema kiosks still trading, as well as 13 corporate outlets that were immediately marked for closure by SV Partners.
The administrators are in the process of identifying restructuring measures, but are also scouting for a potential buyer for the franchise system.
SV Partners said the franchisees remain under the control of individual owners and are not directly affected by the administration process for the head franchiser, although Inside Retail Weekly understands there may be issues associated with head leases on some stores.
SV Partners has assumed control of Eagle Boys’ head office day-to-day
operations, with a focus on maintaining business as usual and continuing with negotiations on the future of the business while a review of the system is underway.
In a media statement, the Eagle Boys management team declared it is looking forward to the prospect of growing the brand under new ownership.
The first creditors meeting will be held in Brisbane this week, where details of the extent of any funding shortfall are expected to be provided.
Last year, NBC Capital was seeking to raise $20 million to pay down debt as it continued to push towards a public float despite the declining store numbers and the consequent reduction in revenues to the franchisor.
Speculation over who might be interested in buying Eagle Boys includes two Brisbane-based groups, Retail Food Group and Collins Foods, but neither firm has flagged formal interest in the pizza chain.
Perhaps the most likely buyer could be Potter himself, who started the business with a single store in Albury, New South Wales, in the mid 1990s.
Potter is one of the minority shareholders in the business and blames the private equity firm’s management approach for the collapse of the chain, comparing the impact of the debt loading on the business with the debt-funded growth at the collapsed Dick Smith.
At Eagle Boys Pizza, debt was not funding any growth, but rather apparently trying to prop up a franchise system under siege from rival, Domino’s Pizza, and riddled with discontent from franchisees.
Like most of the fast food sector, the Eagle Boys franchise system has been under close scrutiny from the Fair Work Commission over under-payment of staff, particularly for delivery drivers.
A number of Eagle Boys franchisees have been prosecuted over their failure to meet award entitlements and the heat from the Fair Work Commission on the pizza chain has increased since the 7-Eleven wages scandal.
The price wars in the take away pizza category were led by Domino’s Pizza and have hit margins and the profitability of many chain and independent pizza stores.
For Eagle Boys franchisees, there were fees to be paid to the franchisor that cut their profitability, while Domino’s blitzed their branded system on marketing and advertising initiatives.
SV Partners has indicated it already has received inquiries about the Eagle Boys chain but, as with other administrations, most of the interest is from tyrekickers keen to see the financials rather than genuine buyers.
Domino’s, which is the market leader in the category in Australia and has expanded successfully into overseas markets, has been touted as a potential buyer of the Eagle Boys business but is unlikely to be interested at anything higher than a bargain basement price.
Domino’s has a better store network, doesn’t need the backroom systems and might face some pushback from the competition regulator.
The Retail Food Group continues to be on the lookout for further retail food chain acquisitions, but Eagle Boys is a ‘commodity’ pizza business, and as such it competes more on price than RFG’s Crust Gourmet Pizza and Pizza Capers businesses.
Retail Food Group would, like Domino’s, have little interest in paying for Eagle Boys’ backroom processes and franchisor systems and would probably want to cherry-pick locations that might be rebadged to its existing brands.
While the listed multi-brand food retailer sees further acquisitions as a strategic growth platform, Eagle Boys would not appear to be a comfortable fit as another standalone brand.
However, Retail Food Group did note in a statement to the Australian Stock Exchange that it was interested in buying “complementary businesses which are earnings per share accretive, capable of generating increased supply-side scale, and that enhance the number of brand systems and outlets owned or serviced by the company.
Collins Foods, the listed Queensland-based company, has recently flagged its interest in acquiring more retail food businesses after finally gaining traction in sales and earnings.
Collins Foods operate 178 KFC and 86 Sizzler restaurants in Australia and around Asia, as well as Snag Stand, which has five company owned outlets and one franchise outlet.
Pizza would be a new category, but represents an opportunity for Collins Foods to enter the category with a chain that has some scale and where the backroom systems of the franchisor would be useful.
Eagle Boys Pizza is not in great shape as a business and SV Partners moved to close 13 company owned stores in Queensland, New South Wales and Western Australia within a week of assuming control.
SV Partners said the closures were part of an ongoing review to identify cost saving restructuring measures, with the aim for positive growth.
The administrators reported that most franchised Eagle Boys stores were experiencing record sales for the week following the announcement of the administration in an apparent show of support by customers.
Founder to buy back chain?
Whether or not Potter would consider buying the business back from the administrators would depend on his view of the possibility of rebuilding the battered chain in the current market dynamics.
Potter left school at 15 and opened his first pizza shop in Albury at 23 after being unemployed. The business expanded rapidly under a franchise model, but today retail franchising has become more problematic, the pizza category has matured in terms of store numbers, wages costs are higher, and price wars have left profits thinner than a pizza base.
Potter claims he was threatened with legal action when he tried to offer help to the business when it became apparent that it was floundering.
Potter said NBC Capital had made many strategic mistakes, including increasing prices, changing the brand positioning, reducing advertising, paying too little attention to the relationship with franchisees and turning over management.
Documents filed with the Australian Securities and Investments Commission by SV Partners indicate Eagle Boys Pizza either could not pay its debts, or was likely to be unable to meet commitments shortly.
The chain has been embroiled in disputes with franchisees over several years, with around 30 store owners, some of which had gone bankrupt, last year planning a class action against Eagle Boys.
The actual level of debt or impairment has not been publicly disclosed, but it is understood that NBC Capital and minority shareholders are unlikely to retrieve any of their invested funds.
The 15 per cent of the company not owned by NBC Capital is understood to be held by Potter and five former staff members.
NBC Capital is understood to be keen to abandon and write off the venture rather than to negotiate a scheme of arrangement.
Eagle Boys has about 4.6 per cent of the Australian pizza market, trailing behind sector leader, Domino’s, with 25 per cent and Pizza Hut, owned by Yum Restaurants Australia, with 10 per cent.