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Priszm Income Fund (QSR.UN-T), the franchisee for more than 400 KFC, Taco Bell and Pizza Hut restaurants in Canada, has successfully obtained court protection from its creditors under the Companies Creditors Arrangement Act.
After a brief appearance in a Toronto courtroom this morning, the company released a statement said it made the move to facilitate the sale of its restaurants, which employ 6,500 people.
The company’s executive chairman, prominent Toronto business figure and Toronto Raptors founder John Bitove, has resigned, as have “all existing trustees and directors” of the company.
Priszm cited the previously announced “potential sale” of 231 locations in Ontario and British Columbia to Soul Restaurants Canada Inc., as well as the potential sale of “all other locations outside of those in Ontario and B.C.”
The statement said that on March 22, it received “a number of expressions of interest for its remaining restaurants” and is reviewing the offers. It said it would have to apply for court approval of any sales.
FTI Consulting Canada Inc. has been appointed as the monitor for the CCAA proceedings, and the company’s current chief financial officer, Deborah Papernick, has been appointed the chief restructuring officer.
The company’s statement said that it operations would be uninterrupted and that it obligations to employees and suppliers made after today would continue to be met. It said its existing secured lenders have agreed to provide up to $3 million US in additional financing during the proceedings.
In 2010 Priszm’s same-store sales were down 5.6 percent from 2009. In such a negative environment, Priszm announced in December that it was selling 232 restaurants in Ontario and British Columbia for $46.4 million.
The sale was sparked by an unmanageable debt load. In December the company had $65 million of long-term debt maturing, but mid-month the trust did not pay interest on it to its senior lender. Although the restaurant sales were supposed to help solve this problem, it was clear when the sale was first announced the company would still be about $20 million in the hole in December alone. Because things haven’t improved, Priszm has since been forced to extend some of its financing agreements because it does not have the money to pay back senior lenders.
The debt problems couldn’t have come at a worse time because Priszm is in the midst of upgrading its locations that did not meet Yum! Restaurants Canada’s image standards. (Yum owns the franchise rights.)
Priszm’s downfall has spilled over into Scott’s REIT, and Bitove is the chairman of both companies. Seventy-eight of the restaurant locations that were to be sold are leased to Priszm by Scott’s REIT.
In an interview conducted last month, Bitove acknowledged that KFC had been a tough sell in Canada, with franchise agreements that require that capital be spent upgrading the stores.
“Given the performance of the brand over the last three or four years it’s been difficult financially to make it all work,” Bitove said. “The business, the KFC brand, has been struggling in Canada.”
He said Priszm, until 2007, had invested large amounts of money adding Taco Bells to KFC locations, but then ran out of sites to do this.