$28m pushes Eagle Boys off the pizza perch

By DITA DE BONI

The eagle has landed - in the lap of Pizza Hut, which ended weeks of industry speculation last night by announcing it had bought 53 Eagle Boys pizza outlets and the brand's master franchise in New Zealand.

Creating New Zealand's largest pizza chain will cost Pizza Hut's owner, Restaurant Brands, $28.3 million.

Pizza Hut's size and revenue will almost double to 82 stores turning over around $80 million a year.

Ten "older, underperforming" Pizza Huts and five Eagle Boys outlets around the country will be closed, the company said.

All Eagle Boys stores will be rebranded as Pizza Hut delivery and takeaway outlets.

The merger will place a Pizza Hut within eight minutes' drive of 90 per cent of all New Zealanders.

It is expected most Eagle Boys franchise holders and support staff will be asked to stay on as Pizza Hut employees.

Due diligence and the finalisation of details with Eagle Boys Australia has yet to be completed.

Once this is done, Eagle Boys shops will be progressively changed to Pizza Huts over six months from May 1.

The merger of the two chains is expected to save Pizza Hut around $800,000 in the first full year of merged operations, although closure costs will result in a one-time charge of $2.2 million after tax, to be taken in the November 2000 year.

Chairman Bill Falconer said the enlarged pizza operation and Starbucks coffee business would lift Restaurant Brand's non-KFC portion of pre-tax earnings from 11 per cent in 1999 to an expected 30 per cent in 2001.

The acquisition will be 100 per cent financed from debt, and no new equity will be needed. Restaurant Brands will maintain earnings of 4.5 times the interest charges because of its strong cashflow.

The company is pinning its hopes on pizza consumption rising to the levels of Australia or North America, where 90 per cent of households eat pizza once a week.

New Zealand's pizza market is now worth $100 million a year.

One industry figure told the Business Herald that a likely reason for the merger was the expected entry of Australian pizza giant Domino's into the local market within the next two years.

But Restaurant Brands chief executive Jim Collier last night denied that the Domino's threat had prompted the deal. He said the urge to merge came from a reassessment of the Pizza Hut store format.

The company had for some time been considering changing the sit-down format of Pizza Hut stores to focus on the increasingly popular delivery and takeaway outlets.

He said Pizza Hut was strong in Auckland, while Eagle Boys was strongest in the South Island and Wellington.

Mr Collier, who earlier told the Business Herald that speculation of a Pizza Hut buy-out of Eagle Boys was a "rumour that refused to die" and a case of "one plus one equals 83" on the part of the media, said the "difficult" deal was struck after Pizza Hut approached Eagle's owners some time ago.

"It's a good business and people don't like to give up a viable New Zealand operation just because someone asks them. But I think we are paying a fair price for a very good business."

Mr Collier said his company would not be trying to buy the Australia Eagle Boys operation.

Some of Eagle Boys' most popular products - such as the chain's apricot chicken and BBQ pizzas - would be incorporated into the Pizza Hut menu.

Australian and New Zealand Eagle Boys representatives could not be contacted last night. It is understood the managing director of Eagle Boys in New Zealand, Gavin Cook, will remain as a consultant to Pizza Hut for six months after the merger is finalised.