Deals

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

Chuck E. Cheese, the raucous pizza chain-slash-arcade fronted by a cartoon mouse, has long sold itself as a place "where a kid can be a kid." How much of a prize it turns out to be for its owner, Apollo Global Management, may depend on its sway with adults.

It's been two years since Apollo bought parent CEC Entertainment in a $1.3 billion take-private transaction. Since then, the chain -- which lets children cash in tickets earned from playing games such as skee ball for goodies including candy and stuffed toys -- has ramped up its efforts to give kid-chaperoning adults more reasons to make it a destination.

Life Under Apollo
Chuck E. Cheese's parent CEC Entertainment has grown since its buyout by Apollo, but is it enough?
Source: Company filings

As well as rolling out free guest Wi-Fi, putting staff through enhanced hospitality training and improving the cleanliness of its venues, the company last year introduced a new menu targeting, in the words of CEC's chief executive, "the more sophisticated tastes" of parents. It's now in the middle of launching a weekday lunch buffet at all of its Chuck E. Cheese locations, a move designed to tempt parents, grandparents or babysitters looking after kids too young to be at school or those that are home-schooled, to drop in for quick visits during an otherwise quiet time.

The changes have had an impact. Revenue rose about 11 percent in 2015 to about $920 million, while adjusted earnings before interest, taxes, depreciation and amortization (a financial metric that has received scrutiny from many including my colleague Shira Ovide and Omaha oracle Warren Buffett) rose 13 percent,  CEC said on Thursday. It's not yet profitable -- the company posted a net loss of $12.5 million -- but that's an improvement from its $62.1 million loss in 2014.

Because CEC's stock is no longer publicly traded, the company doesn't face pressure from shareholders to speed up turnaround efforts. That said, Apollo, like many private equity firms, turned to debt markets to help finance the deal --  it's here where CEC Entertainment is being critiqued. Loans backing Apollo's buyout fell to roughly 94 cents on the dollar earlier this month after Moody's downgraded it further into junk territory.

The ratings firm believes CEC's debt is a riskier bet as weak consumer spending and intense competition threaten the company's ability to dramatically improve its operating performance. That would make it less likely to be able to quickly reduce its debt load.

Customer Dissatisfaction
The value of the term loan backing Apollo's buyout of Chuck E. Cheese's parent fell in February due to a Moody's downgrade.
Source: Bloomberg

Although Apollo has plans to expand internationally by franchising, the company may yet falter in its path to profitability. If its revenue and Ebitda growth stagnates or worse yet, reverses, CEC could end up mimicking companies like Gymboree, a Bain Capital-backed chain that sells apparel but also hosts children's play-programs and parties. Bonds backing that 2010 buyout have fallen to roughly 25 cents on the dollar. 

For Chuck E. Cheese, sweetening the experience for adults who determine the frequency of visits  is a smart move, but it faces an uphill battle. Customer reviews on sites like Yelp and Tripadvisor show the new menu hasn't found many fans. 

In the face of continued "never again" vows from parents dated as recently as this month, management may have to try a little harder.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. CEC estimates that the average kid wants to visit 11 times a year but only makes it three times.

To contact the author of this story:
Gillian Tan in New York at gtan129@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net