Priszm's recipe for disaster

With his fund's future so uncertain, will John Bitove's lenders double down?

John Bitove has eaten six Double Down sandwiches in the past three weeks. “I love them,” he says of the KFC offering, which consists of bacon and cheese nestled between two pieces of fried chicken. If everyone enjoyed deep-fried fare as much as Bitove, who operates 432 KFC, Taco Bell and Pizza Hut franchises in Canada through the Priszm Income Fund, then perhaps his business wouldn’t be in a cash crunch today.

The fund disclosed this month it is not in compliance with one of its debt covenants, and reported there is “significant doubt” it can repay the $65.6-million loan as required by Dec. 31. Priszm, which franchises from Yum Restaurants International, also can’t pay $15 million this year to renew licences and refurbish 75 properties. Around 225 more restaurants are up for renewal through 2013. But with little cash and weak sales, Priszm’s future is in question.

Bitove, the Toronto entrepreneur behind new wireless entrant Mobilicity, downplays the situation. “The business has strong brands that are profitable,” he says. “It’s just not as profitable as it was.” Priszm lost $30.7 million in the past two years, and is in the hole $1.5 million so far this year as same-store sales declined every quarter. Units traded at $11 three years ago, but go for just 30? today. Executive turnover has been high. “When you have declining sales, it causes turmoil in any business, because people start pointing fingers,” says Bitove, who is in talks with lenders.

KFC restaurants make up the bulk of Priszm’s franchises, and the fast-food chain has struggled to adapt to healthier eating trends. Prizsm’s structure is causing further woes. Other restaurant trusts, such as A&W Revenue Royalties Income Fund, earn money on royalties paid by franchisees, whereas Priszm pays royalties to Yum and shoulders operating costs. Minimum-wage increases have hurt Priszm, as well as marketing spending. The fund used to handle marketing for all Yum brands in Canada, but turned over the duties last year as costs mounted and Yum strengthened its international marketing arm. “My biggest regret is that we didn’t hand back marketing three or four years ago,” Bitove says.

A former Priszm executive who requested anonymity argues the fund also failed to properly upgrade old assets to entice customers, and open new locations in growing markets. Much of the fund’s cash went to unitholders in the form of distribution payments, meaning it wasn’t able to adequately reinvest in the business. By the time Priszm stopped distributions last year, its ability to pay down debt was already in doubt. “They’d been paying distributions out a little too long,” says the former executive.

The largest individual holder, with 1.2% of the units, is Bitove. (Combined with his voting shares, his Priszm stake is roughly 40%.) He maintains every decision, including when to cease distributions, was made in the best interest of the business. The fund is now working with lenders to refinance (it was already supposed to find a new lender by June 30, but failed to do so), and is considering selling restaurants. Priszm cautioned in its recent earnings report there is no guarantee it can work out agreements on either front. Bitove remains optimistic, however. “Businesses go through cycles,” he says. “Sales will rise again.”