TRYING YOUR DAMNEDEST to achieve the best transaction for your employer – while wondering if the deal could put you out of a job – is not the most comfortable of situations. It’s made even more complicated when the two demerged businesses will continue to work with each other – even sharing a finance function for some time.
For Pizza Hut UK finance director Henry Birts, this was the situation that he – and the rest of the senior management team – faced when the company demerged its restaurant and delivery business.
“I’d describe it as a delicate process,” says Birts in a bit of an understatement. “Communication throughout was critical.”
From the outside, Pizza Hut would seem to be an uncomplicated business. It makes pizzas, selling them through restaurants or vie collection/delivery. But that would be too easy – and too dull a story.
Instead, the Pizza Hut brand is owned by Fortune 500 business Yum!. Prior to the divestment, it owned dozens of Pizza Hut restaurants (with 11 operated through franchises) while franchising the vast majority of the delivery part of the business.
Yum! realised that the two parts of its business – although sharing many commonalities and economies – had separate business models. “Operationally and in a marketing perspective”, the two businesses were unofficially split three and a half years ago, explains Birts. But two key back-office disciplines under Birts’ control, finance and IT (as well as the supply chain), remained unseparated.
“We were looking at two separate P&Ls for a number of years, to have as clean a read of the trading and profitability of two businesses,” Birts says.
But the weight and focus of those two disciplines’ work was the restaurant business, where the capital and revenue cost base sat. “Two-thirds of the delivery business was franchise income. Our financial leverage was always around the restaurants … if that succeeded, that would determine the performance of the company, to an extent,” he says.
A tasty deal
Huge efforts were made to turn around the restaurant business, which posted a £13m operating loss from £331m revenues in 2011. Simplified, yet more rigid, processes for shift management, and “getting the basics right” of better food and ‘customer experience’ have paid dividends.
“We had 150 checkboxes that mystery shoppers would check. There was no chance that we’d be able to internalise that … so we boiled it down to five: embrace like a friend; discover the desire; showtime; fuel the fun; fond farewell.” Birts says. “So, for example, ‘fond farewell’ is making sure that the end of the meal places customers in the mood to return. It’s about not taking a robotic approach, and we’ve done a similar thing in the kitchen. The back-of-house are also heroes of this business.”
But during the turnaround process, Yum! set about preparing for a sale of its restaurants. Taking more than 18 months from beginning to end, the management team found a buyer, while, Birts admits, the regional managers kept up the momentum of the restaurants’ improvement.
A not-insubstantial 35 investors were met as part of securing a deal, with PwC running the overall project.
Private equity firm Rutland began negotiations with Yum! for the restaurants. Birts and the other restaurant-side executives threw their hats into the ring to remain in situ under new owners, in what would effectively become an MBO.
“Even though we were selling the business, we were keen to be part of the solution – we were very upfront with Yum!,” Birts says. “From a personal perspective, there was an amount of uncertainty. It was part of the journey – not easy all the time.”
While Birts says it was “pretty clear early on” that Rutland saw the restaurant team and senior management as people who were delivering (pardon the pun) on an improvement plan, nothing was certain until the ink had dried on the deal in December 2012.
“They don’t know you when you first meet – then they’re getting to know you better, and take their own view. The chemistry we have with the Rutland team was an important part of the deal process.”
It’s not ‘as you were’ for Birts and the rest of management. They now operate as a “much more formal-functioning board”. Birts and two other directors sit alongside chairman David Fitzjohn – former Yum! European MD and an ex-senior executive at Burger King, Laura Ashley and Grand Metropolitan.
Alongside four weekly meetings, the financial reporting side of the business has been revamped. Under its corporate ownership, it put together accounts in UK GAAP but reported to the head office in US GAAP. Now, UK GAAP is used to report to Rutland, but there is a “more pronounced” cash focus, compared to simple profit and loss.
With quarterly advance rent bills juxtaposed with VAT in arrears – yet sometimes paid on the same day – there are “extraordinary outflows of cash” that determines the business’ funding requirement. Keeping an eye on payment terms with suppliers is also a key aspect for Pizza Hut.
While other parts of the two businesses had operated as separate entities for a while, life was more complicated for the accountants. As Birts describes, it was the nitty-gritty of setting up separate bank accounts “one day owned by Yum!, the next day owned differently”. Then came splitting the cash, managing invoices: “Fascinating but tough.”
And while some things have changed, others have remained the same. Curiously, the new business is still running the finance function for Yum!’s delivery outfit, as part of the deal.
Understandably, there was “lots of work done pre-deal” for fair allocation of the function’s cost.
With the hint of a wry smile, Birts says it has been a “big incentive” to help Yum! recruit its own finance function and hand over, “so we can get back to the core job”. That isn’t to suggest that the delivery business has conspired to rid itself of Yum!. In fact, it has done the opposite of this. As Yum! still owns the brand, the two continue to work closely together, with Rutland-owned Pizza Hut UK as a franchisee. Naturally, this made Yum! more interested than many sellers would be in the identity of the buyer.
“It’s all under the same brand, with a lot of commonalities on product,” says Birts.
Technology is to become a bigger part of Pizza Hut’s future – not only to enhance the customer experience, but to automate reports and sales tracking. Even though Birts can text to receive daily sales, and bring together various ‘cuts of the deck’ of the figures, there are opportunities to improve, he believes – “to become slicker”.
Though tracking sales on a daily basis is not unusual for a finance director, Birts is more attuned to the operational side of things than many finance heads.
After a period as a consultant with Bain, followed by some private equity exposure while doing an MBA in the Middle East with INSEAD, he joined Yum! in 2004 as KFC’s commercial director. He then served as an “operator” – a regional manager – for 80 KFC restaurants.
“The accountability for a P&L was fantastic experience, proper management. I was OK at it – I learned a huge amount,” he remembers. While his experiences gave him a financial analysis base, he has not studied technical accounting.
Birts understands that you can’t abdicate responsibility for matters that are out of your expertise, but says you have to question and get close to the matter. While he will “lean” on his control team and “trust them implicitly”, his commercial background helps him frame his questions about the “why” when it comes to the decisions they’ve made. “I have interesting conversations with my team … that’s how I engage with the technical side. I love to have people that can do parts of my job better than I can,” he says.
In many ways, Birts’ obvious enthusiasm for general management is fulfilled at Pizza Hut. For many FDs, the wearing of different hats is, as the saying goes, for their sins. But Birts seems to revel in it. His role incorporates IT, supply chain and property. He is also “intimately involved” with other decision making around the business, such as marketing: “Ultimately, as an MBO, we feel very much accountable – we are owners.”
One change for him is that the network of CFOs he could have leaned on to share war stories at Yum! has effectively gone. He is now making an effort to attend a few events a year to discuss “non-competitive” aspects of the job.
With three young sons to look after, work and family take up most of his time: “I do my upmost to dedicate weekends to the family … but there’s always emails to catch up on.”
Box: Private investment
While many private equity investors remain private, Pizza Hut UK owners Rutland Partners are well known and established.
Formed in 1986, the turnaround and restructuring investors currently operate with a £320m fund. Rutland fronted £20m in support of a £60m refurbishment and restructuring programme of Pizza Hut.
Along with FD Henry Birts, managing director Jens Hofma remained in situ at the restaurant business.
Nick Morrill, managing partner of Rutland, said in November 2012 that the private equity firm had been “very impressed” by the “energy and capability” of Pizza Hut at all levels of the 10,000-strong business.
However, the past year has been one more of awards than deals for the private equity business.
Real Deals named Rutland as turnaround house of the year, while it was shortlisted at the Healthinvestor Awards in the private equity investor of the year category. Also, at the end of 2012, Rutland received a special distinction at the Private Equity Exchange Awards.
But it wasn’t all black-tie events. In June Rutland acquired platforms and lifts businesses AFI-Uplift, Access Rental gulf and Hi-Reach for £85m.
Meanwhile, the firm sold Advantage Healthcare in December 2012 to Interserve for £26.5m in cash, having acquired the business in March 2005 for £9m.
IN BLACK & WHITE
2010 – present CFO, Pizza Hut UK
2008 – 2010 CFO, Yum! MENA
2004 – 2008 Various, including operator, KFC UK
2002 – 2004 Graphite / What If Ventures
2001 INSEAD Business School
1999 – 2000 Kingfisher
1995 – 1999 Bain & Company