Pizza Pizza Expands West


Jun 28, 2007

Pizza Pizza, the behemoth central Canadian pizza maker, has launched a cross-country food fight aiming to take a bite out of the West's burgeoning fast-food market through the acquisition of Edmonton-based Flying Pizza 73 Inc.

The deal, carrying a pricetag of $70.3 million, will give the Pizza Pizza Royalty Income Fund (TSX: PZA.UN) the "intellectual property" of Pizza 73 and its 48-restaurant system, and a nine per cent royalty on sales.

The announcement marks a step in Pizza Pizza's longtime plan to move outside Ontario and Quebec, where it is the dominant provider with 532 locations.

It came one day after Quiznos Sub heated up competition by presenting its own line of flatbread pizzas.

Meanwhile, Western Canada's Panago, marketed as a premium pizza alternative, has opened stores in Ontario, hoping to win market share with side dishes like fresh salad with shrimp.

Pizza Pizza has taken a similar approach with a "signature pizzas" line including flavours like mango chicken and Philly cheese steak.

The company has also found success selling pizza slices to walk-in customers, according to Cameron Wood, editor of trade publication Canadian Pizza.

"The major trend in pizza right now is going towards the single-slice market," Wood said.

"You're looking at a lunchtime group, a commuter or urban professional-type – a slice is a logical choice versus ordering a whole pizza."

The on-the-go customer fits directly with Pizza Pizza's acquisition of Alberta's Pizza 73, Wood suggested.

The company has the opportunity to grab a piece of the booming Western Canada economy which has seen an influx of workers and plumped up Pizza 73's results.

System sales were $65 million in the year ended April 21, up from $52.8 million in the previous year. Sales at outlets open a year or more increased 26 per cent.

Pizza Pizza said it expects same-restaurant sales to grow further, but not necessarily at the double-digit percentage rates experienced in recent years.

Wood said Pizza Pizza could face difficulties moving outside its stronghold.

"I think the challenge for Pizza Pizza is keeping staff," he said, noting that this a problem for everybody in food service in Alberta, where many fast-food attendants are pulling in $15 or more per hour, plus incentives like trips and MP3 players.

The Pizza Pizza trust will acquire the trademarks and other intellectual property of Pizza 73 for $54 million, while the Pizza Pizza operating company will buy the operating business for $16.2 million.

An additional $3 million will be paid in July 2008 if sales and profit targets are met.

The Pizza Pizza operating company will license the trademarks and other intellectual property from the income trust and pay a nine per cent royalty on system sales.

To help fund the deal, the trust plans to issue 2.6 million units at $9.15 each for a total of $23.8 million, and has lined up a credit facility co-led by Bank of Montreal and Toronto-Dominion Bank.

Pizza Pizza chairman Michael Overs and the Pizza 73 vendors have each also agreed to buy $3.5 million worth of units at $9.15 for a total of $7 million.

Founded in 1985, Pizza 73 – with its phone numbers ending in 7373 linked to a centralized call centre – does not franchise its outlets, which are owned and operated as independent businesses that have supplier arrangements and unified marketing with Pizza 73.

Pizza Pizza fund units slipped nine cents to $9.35 on the Toronto Stock Exchange in afternoon trading.