QUALIPORT
PizzaExpress: The Harsh Reality

By Maynard Paton (TMFMayn)
November 11, 2002

Last week, Qualiport company PizzaExpress (LSE: PIZ) revealed it had "received an approach from a third party at a price range of 330 - 350p per share, which may or may not lead to an offer".

The possibility of PizzaExpress being sold for 350p per share has caused much anxiety among shareholders. Will the firm be bought for what many see as a ridiculously low offer?

Whatever happens with the bid, the events at PizzaExpress underline a fundamental point about the stock market: it doesn't owe anybody a living. Here's the harsh reality:

* Hugh Osmond is looking for value, too.

Every investor looks for value. That includes Hugh Osmond, the man behind the third-party approach. If Osmond can spot an opportunity to buy a good company at an attractive price, why shouldn't he take advantage?

Osmond's interests naturally concern the money he can make for himself and his backers. He is under no obligation to do any favours for existing PizzaExpress shareholders, nor should he be. There is no stock market commandment that decrees "thou shalt not bid for PizzaExpress at a price below the company's intrinsic value".

Note also that PizzaExpress shares touched 250p before news broke of Osmond's approach. So there was scope for any (currently aggrieved) PizzaExpress investor to buy in at that level and make a profit (or recoup their losses). Indeed, if a 350p per share offer is said to undervalue PizzaExpress, then there's still the opportunity to make money by buying today at 366p.

Overall, Osmond has simply showed more patience and a greater eye for value than those PizzaExpress shareholders who invested at a much higher price (which includes the Qualiport, whose average buy price is 691p). You can't fault him for that.

* Management don't always act in the best interest of shareholders.

Sad to say, but directors of listed companies don't always have shareholders at the forefront of their minds. Just like everybody else, they too can become greedy, act in their own self-interests and just make plain stupid decisions. Being undone by shareholder-unfriendly management is an inherent risk with every stock market investment.

Has the PizzaExpress boardroom run the company with shareholders in mind? Consistently high returns on shareholders' equity suggest they have, but there has been little correlation between the rewards to shareholders and the rewards to management.

On an aggregate basis, the PizzaExpress boardroom has never owned a sizeable amount of ordinary shares, preferring instead to hold risk-free options and deferred/convertible shares. At present, the board owns just 0.74% of the company (worth only £2m). Indeed, over the past few years, PizzaExpress directors have been net sellers of their shares. A sign perhaps they weren't overly enthusiastic about the prospects for investors?

* There may be better investment opportunities elsewhere.

Investors' loyalties should not necessarily lie with PizzaExpress and ensuring 'fair play' is upheld. Instead, the number one focus must always remain your portfolio's overall performance.

Although the shares may well be cheap, the PizzaExpress story has deteriorated. After 30-odd years of PizzaExpress walking all over its casual dining rivals, the competition has gradually got its act together. Menu enhancements, new dining formats and extensive refurbishments are recognition of the heightened competitive environment.

At the end of the day, long-term investment is all about weighing up business quality with valuation. At 366p per share, is PizzaExpress the best long-term quality bet on the stock market? Almost certainly not. Far more attractive investment opportunities, involving much greater business quality, will undoubtedly crop up elsewhere.

* Don't remain in denial.

If PizzaExpress is sold 'on the cheap' and you crystallise a loss, who will you blame? Hugh Osmond? The PizzaExpress board? Complacent investors? The Qualiport?

There's only one person to blame for any stock market loss: you. PizzaExpress investors have to accept responsibility for their own actions. They have to take on board the two main lessons from PizzaExpress' fall from grace and Osmond's bid:

* Even the best companies can stumble, and;
* Never invest without an obvious margin of safety.

More: Qualiport Holds On For PizzaExpress Recovery

The author owns shares in PizzaExpress.