Hostmore PLC, the UK-based operator of TGI Fridays, has abandoned its plans to acquire the US-based TGI Fridays Inc. due to a significant development that compromised the deal’s financial attractiveness. The decision was made after TGI Fridays lost control over its royalty stream, a key component that was central to the acquisition’s appeal.
In April 2024, Hostmore had agreed to an all-share acquisition of TGI Fridays Inc. for approximately £177 million, a deal that valued TGI Fridays at about 5.4 times its FY23 underlying earnings before interest, taxes, depreciation, and amortization. However, this acquisition was highly dependent on the predictable and highly cash-generative royalty stream from TGI Fridays’ franchise agreements.
The termination event occurred when Citibank, the trustee overseeing TGI Fridays’ 2017 whole business securitization, declared a “manager termination event” due to TGI Fridays’ failure to file necessary documents to bondholders within a specified time period. This led to the loss of control over the royalty stream, which was the primary attractive feature for Hostmore in pursuing the acquisition.
Hostmore stated, “The predictable and highly cash-generative royalty stream of TGI Fridays was the primary attractive feature for the group in pursuing the acquisition. Following the termination, the acquisition is no longer being actively pursued.”
The loss of this royalty stream control has severe implications for Hostmore. The company is now proceeding with the sale of its UK restaurants to new owners, aiming to transition to a fully franchise-operated model. However, the sale process is facing challenges, with offers received being lower than the stores’ secured borrowing value. This suggests that Hostmore may not recover significant value from the sale, and the company is expected to be wound up and delisted from the London Stock Exchange once the sale is completed.
Hostmore’s shares plummeted by over 90% following the announcement, reflecting the significant loss of value in the company’s future prospects. The company’s year-to-date like-for-like sales have also declined by 12%, further exacerbating the financial challenges.
Despite the current setbacks, both parties have indicated that they remain open to re-engaging discussions “if circumstances warrant.”
The TGI Fridays brand, with its significant global presence of over 270 sites, including 128 in the US, continues to face broader industry challenges. Systemwide sales for TGI Fridays fell an estimated 15% last year, and the current sales trend appears to be worsening.
In summary, the collapse of the Hostmore-TGI Fridays acquisition deal highlights the critical importance of maintaining control over key revenue streams in corporate transactions. The future of Hostmore and its operations will be closely watched as the company navigates this challenging period.