Eagle Boys and Pizza Hut merger on the table in private equity buy-up deal

Pizza chains Eagle Boys and Pizza Hut could be merged to form Australia’s second-largest pizza chain, if a reported deal for private equity outfit Allegro Funds comes to fruition.

Together Eagle Boys and Pizza Hut are estimated to hold up to 35% of the market for takeaway pizza in Australia, with a combined store footprint of 384 outlets. Australia’s largest pizza chain Domino’s operates more than 600 outlets in Australia and New Zealand.

According to a report from Fairfax, Sydney-based private equity firm Allegro Funds is in “advanced talks” to buy the Eagle Boys chain from the company’s voluntary administrators SV Partners, and to buy the Pizza Hut Australian business from parent company YUM! Brands.

Allegro, which owns Carpet Court, Great Southern Rail and bus maker Custom, is reportedly one of two private equity firms to show interest in the pizza chains over recent months, with the firm moving closer to securing a deal following the appointment of David Stimpson and Terrence Rose as administrators to Eagle Boys in mid-July.

Thirteen company-owned Eagle Boys have closed in the time since, while the Eagle Boys head office reportedly owes $30 million to creditors.

Stimpson and Rose have also been appointed as voluntary administrators to EB Pizza India Pty Ltd, EB India Holdings Pty Ltd and EB Pizza Fiji Pty Ltd.

Fairfax reports it is uncertain if Allegro would seek to continue to operate the brands separately or rebrand Eagle Boys stores to Pizza Hut outlets, if a deal is finalised.

Graeme Houston, general manager of Pizza Hut Australia, told SmartCompany Pizza Hut’s “policy is not to comment on market speculation”.

SmartCompany contacted Allegro Funds and Eagle Boys’ administrators SV Partners but did not receive a response prior to publication.

What a merger could mean for franchisees

Jason Gehrke, director of the Franchise Advisory Centre told SmartCompany a sale of a franchise network does not automatically mean the buyer will negotiate new franchise agreements with existing franchisees.

“Most franchise agreements include a provision that allows the franchisor to reassign the agreements without recourse,” Gehrke says.

“This allows the franchisor to sell the business and not necessarily have to have the consent of franchisees.”

Gehrke says in the event of a sale, the buyer of the franchise network would take on existing franchise agreements but may “subsequently seek to vary the agreements or replace them with new agreements as they determine what the future network will look like”.

In circumstances where one franchised business buys out another similar business, or two franchise networks merge, Gehrke says there is commonly an overlap in the location of outlets.

“Where there’s an overlap, in some cases, outlets may close or may be released from their [franchise] agreement and allowed to trade independently,” he says.

The question of branding is also an important one in these circumstances, says Gehrke.

“Any buyer who acquires a brand has the question of whether they continue with that brand or whether they absorb it into the other, primary brand,” he says.

“If they absorb it, the new outlets in time would need to be rebranded. The question of who pays for it, either franchisees or franchisor, may determine how successful that rebranding is.

“If the franchisor pays, it will likely happen quickly and be done comprehensively. If the franchisees are to pay, it’s quite likely there will be a significantly extended implementation timeframe … and internal resistance.”