Bitove quits as Priszm goes into protection

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It was a fight in the chicken coop that drove John Bitove's fast-food group into court protection.

Mr. Bitove, until Thursday the executive chairman of the company that operates 428 KFC, Pizza Hut and Taco Bell franchises across Canada, blames KFC's parent for the company's collapse. The parent, Kentucky-based Yum Brands Inc. , disagrees.

Mr. Bitove, along with the directors and trustees of Priszm Income Fund , resigned Thursday as the group filed for court protection under the Companies' Creditors Arrangement Act (CCAA), having struggled for years as Canadians failed to develop a strong enough taste for its fast-food fare, largely Kentucky Fried Chicken.

Priszm owns and operates 60 per cent of all KFC outlets in Canada, and sales have been declining steadily since 2009. Its revenue fell 6 per last year to $415.8-million and its operating profit dropped 35 per cent. Same-store sales, a key measure in the restaurant trade, fell 6 per cent in 2010.

"I'm out of it," Mr. Bitove said in an interview. "Once the end kind of became inevitable I just saw my goal was to maximize the proceeds and minimize the pain that would be felt post the sale of the restaurants."

Business "has been a bad four years," Mr. Bitove said. "Last year was the absolute worst year of the 11 years that I've been involved in the business."

Mr. Bitove blamed a lack of innovation by Yum Brands, which operates 37,000 KFC, Taco Bell and Pizza Hut restaurants around the world. "It's not just Priszm, the whole KFC system in Canada has been struggling for some time," he said.

KFC's Canadian outlets have traditionally specialized in selling buckets of chicken, but in the U.S. and other markets, Yum is moving away from "large packs" and trying to update its menus with more sandwiches. Those changes are supposed to come to Canada but the move will take time.

Even so, the new offerings haven't done much for Yum in the U.S. The company's sales and profits have been stagnant for years. Last year Yum's 20,000 U.S. restaurants generated $4.1-billion (U.S.) in sales and posted a $668-million profit. By contrast, the company's 4,000 restaurants in China had the same revenue and a $755-million profit.

Much of the fast-food business is having a tough time in North America, except for industry leader McDonald's Corp. Burger King's revenue dropped 8 per cent in 2010 and same-store sales fell 5 per cent. Yum is selling hundreds of Long John Silver and A&W Restaurants and Wendy's/Arby's Group Inc. is unloading its struggling Arby's chain.

Priszm's financial troubles escalated last summer when the company had to upgrade 75 restaurants under a franchise agreement. The upgrades, which cost about $100-million (Canadian), were suspended last fall because of declining sales.

Mr. Bitove said he tried to negotiate a new agreement with the Canadian arm of Yum, but it balked. "We didn't get the co-operation from our franchisor that we needed," he said. As a result, he said Priszm made plans to sell the restaurants in order to cover a loan that was in default.

Sabir Sami, general manager of Yum Restaurants Canada, disagreed, pointing to a string of $2-million royalty payments owed to Yum that Priszm has missed in recent months. He said talks took place for two years on how to finance the needed renovations at the restaurants.

"We gave them extensions and we gave them delays as well as some facilities to allow them to restructure their business," Mr. Sami said in an interview, adding that not all Canadian KFC franchisees were suffering in the same way. "After two years, it became clear to us, and to them, frankly, that they were not going to be able to meet their obligations."

Both Yum and Priszm say the operations of the affected restaurants will continue during the restructuring process and that customers would be unaffected. Priszm said its existing secured lender, Prudential Investment Management Inc., has agreed to provide up to $3-million in additional financing during the restructuring.

Priszm says it needed the CCAA filing to complete the previously announced $46.4-million "potential sale" of 231 locations in Ontario and British Columbia to Soul Restaurants Canada Inc., the local arm of a British-based company that owns about 40 KFC franchises.

Priszm also said that on March 22 it received "a number expressions of interest" for its remaining restaurants, and that it was reviewing the offers. Priszm said it would have to apply for court approval of any sales.

Priszm's downfall has could have ramifications Scott's REIT , where Mr. Bitove is the chairman. About half of Scott's REIT properties are leased to Priszm as restaurant locations. But Mr. Bitove said the effect on Scott's REIT would be mostly positive, as it would allow it to continue diversifying, shifting away from acting primarily as a landlord to KFC outlets.

"They'll be fine, in fact the REIT will be in a better position," said Mr. Bitove, who also runs XM Canada satellite radio and new cellular provider Mobilicity.

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THE JOHN BITOVE FILE

The serial entrepreneur has fast food in the blood as the son of John Bitove Sr., who built a catering empire which grew to include the Canadian franchise rights to the U.S. burger chain Big Boy as well as the food and beverage contract for Toronto's Pearson Airport.

The family also had the food-service contract for Toronto SkyDome when it opened in 1989, and faced fan anger for high-priced hot dogs and gourmet pizza. An avid sports fan, John Bitove was involved in a failed bid to bring the 2008 Summer Olympics to Toronto. However, his biggest career success came in 1993, when he convince the National Basketball Association to give Toronto an expansion franchise.

Responding to animal-rights criticism from activist and actress Pamela Anderson over KFC's treatment of chickens, he famously invited the former Baywatch star to lunch to discuss her concerns in 2005. She refused.

In addition to the KFC-operating Priszm Income Fund - where he resigned as executive chairman on Thursday - he is active in the media and telecom industries. Mr. Bitove brought XM satellite radio to Canada, and is the founder of cellular upstart Mobilicity.

Staff