Pizza Express - The Game Theory

All,

First: We like our SSNs and will be looking to increase size if still available. Please refer to our analysis here.

Second: Hony with fresh cash is good news in principle, even if not for everyone.

Third: Operations are right on target.

Conclusion:

- Hony are kicking the can down the road. Buying themselves a blocking minority in the SUNs and restructuring those to free-up cashflow for additional Super Sr. RCF and an extension of the SSNs should put Hony back in the money.

- The SSNs would end up 7x levered with the market creating the company at 6x.

- Fresh cash into the company will be the best and most accretive way to increase EBITDA (£20m refurbishment of UK estate for £8m in incremental EBITDA + continued international roll-out to gain critical mass - and “hopefully" some pruning of the rather widely spread footprint)

Constraints:

- £80m at 20% - 40% ~ £25m investment

- An upsized RCF means layering the bonds

- The company cannot afford paying incremental cash interest

Dangers:

1) Hony could elevate their SUNs (exchange for P.P. in £100m basket or Super Sr. in £70m basket) and make up to £55m profit.

- Hony would meet with an unforgiving wall of lenders in two years' time.

- The company needs to make space for fresh Super Sr. Cash interest. So maybe Hony would go PIK.

- The increased RCF will want to remain super sr. So chances are that Hony would go at best P.P. with the SSNs.

- Hony might merely want to elevate its notes to P.P. position, but elegantly offer the SSNs a favourable inter creditor. This could help move the SUNs out of the money even further (required?) and perhaps allow for the survival of that investment in any future restructuring (perhaps not needed if only sr. to equity).The threat of a more aggressive elevation could split the SSNs and have them agree to an extension and said intercreditor (unless cross holders hold enough SUNs to make it worthwhile and enough SSNs to block an agreement). We think it would work.

2) Like Brait on New Look, Hony’s affiliate will likely retain voting rights.

- £80m are 40% of the SUNs - more than enough for a blocking minority.

- We imagine the vast majority of SUNs looking to tender here.

- With a new Super Sr. RCF lined up and a blocking minority in the SUNs and an impending maturity to serve as trigger, Hony would be in a great position to restructure the SUNs, free up £17m of cashflow and afford itself the new RCF.

Prior to its mandate, Houlihan’s position on the name has been very much respectful of the need to treat the SSNs fairy. That has been the unequivocal message presented to Hony when they paraded advisors and we assume that’s what they were hired for. So in light of fresh cash committed by the sponsor (even if only on the liability side) we see no reason to expect any unreasonably aggressive move by Hony that would hurt the SSNs.

Wolfgang