A look at the future of Chuck E. Cheese
Few restaurant chains generated as much speculation during the pandemic as Chuck E. Cheese.
The chain sparked some controversy after discovering that it had created a secondary brand called Pasqually’s which sold its pizzas on delivery. More recently, however, its potential bankruptcy suggests it may close all of its stores.
Chuck E. Cheese isn’t going anywhere, of course. Its parent company, CEC Entertainment, might not even file for bankruptcy. But it appears to be destined for some sort of sale coming out of the pandemic. And the fact that several buyers are interested in the company shows that many investors see its profitability before the pandemic as too attractive to ignore.
CEC, which also owns Peter Piper Pizza, has been in the market in one form or another for quite some time. The company, which is owned by private equity firm Apollo Capital Management, explored an initial public offering in 2017. Last year it agreed to a merger with shell company Leo Holdings as part of a deal that would have made CEC go public through the back door. . This agreement collapsed last year.
Its sales plummeted during the pandemic, and the company hired advisers in May to analyze strategic alternatives. Earlier this month, reports revealed that he was considering filing for bankruptcy as part of that process.
The company’s main problem is that it has $ 1 billion in debt, a legacy of the channel’s takeover by Apollo in 2014. Last year’s merger was intended to write off some of that debt.
Leveraged buyouts have killed many restaurant businesses. The CEC paid $ 87.2 million in interest last year on $ 912.9 million in revenue. Spending almost 10% of your income on interest payments makes it all the more difficult to earn a profit, and the CEC did not, losing $ 29 million.
But get rid of that debt and the CEC has a lot to do. As the attention paid to Chuck E. Cheese in recent months shows, the company enjoys great notoriety. Additionally, its games tend to be very profitable, and certainly more profitable than selling food to consumers in a restaurant format.
The company’s adjusted EBITDA margin, or earnings before interest, taxes, depreciation and amortization, was 20.2% last year. This kind of margin is intended to attract buyers who see the notoriety of the business and decide to get started.
And, indeed, some buyers seem to be considering it. One of them, according to the Wall Street Journal, is grocery mogul John Catsimatidis, who apparently bought some of the CEC bonds on the open market.
Another group of bondholders are apparently willing to invest up to $ 100 million and avoid the chain’s bankruptcy.
These potential buyers apparently adopt a “loan-to-own” strategy, in which potential buyers take on debt in secondary markets, where they are negotiated at a discount by former loan holders who fear for the future of a business. These bondholders then leverage that debt to acquire equity in the business.
Seems like a good way to buy chain restaurants these days. Fortress Investment Group used such a strategy to grab Krystal and the old Craftworks chains. This should be a popular M&A strategy in the coming months, as more channels seem to be heading into Chapter 11.
Granted, there’s usually a reason why corporate debt trades at a discount. CEC’s credit rating has been downgraded since the pandemic, and it’s important to note that the company’s EBITDA margin was achieved in a world before the coronavirus.
The pandemic looks likely to change the way consumers use restaurants for a long time. And that will hurt most of the chains that depend the most on restaurant customers. Chuck E. Cheese certainly fits this bill.
Still, for these potential buyers, it might be worth it. After all, kids will always want birthday parties. It might just be a matter of when their parents are comfortable having them.