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Hostmore, a UK hospitality firm, has launched an audacious bid for US restaurant group TGI Fridays. Yet, the question remains whether this ambitious move will prove to be a strategic masterstroke or a misguided gamble.

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Despite the prevailing trend of US companies buying out UK-listed firms, UK hospitality company Hostmore has surprisingly made a £177mn bid for US restaurant group TGI Fridays. However, since being spun out from Electra Private Equity in November 2021, Hostmore has not performed well on the market. The company’s shares have dropped by over 80%, and its market cap is now less than £24mn. The company has also been loss-making and generated minimal free cash flow from its 89-store chain.

Background

The full-year accounts for 2023 are yet to be published, but preliminary figures reveal a disappointing cash profit of just £2mn on revenue of £191mn. A stark decline of 94% and 2% respectively on the previous year, accompanied by a free cash outflow of £3mn. Despite these concerning figures, Hostmore carries a lighter debt burden than TGI Fridays, which has a net debt of $171mn (£134mn).

TGI Fridays operates 100 company-owned stores in the US and franchises almost 500 more in 43 different international markets. Both companies have similar employee numbers, with approximately 4,400 people working in each.

An Unconventional Reverse Takeover

Given their relative sizes, this all-share deal effectively serves as a reverse takeover. Hostmore shareholders will hold 36% of an enlarged group that would have revenue of around £490mn and free cash flow of £30mn. Despite the perceived benefits, its net debt would inflate, reaching nearly £160mn.

TGI Fridays’ current shareholders, including TriArtisan and hedge fund MFP Partners, would hold the remaining shares. However, Hostmore’s management would continue to operate the business. Hostmore’s Chairman, Stephen Welker, believes that this deal offers scale and flexibility benefits and could enhance shareholder returns.

A Controversial Move

Despite the confidence expressed by Hostmore’s management, the deal has sparked scepticism. TGI Fridays is viewed as a “tired brand,” and the recent 11% decline in its quarterly revenue reflects this. Additionally, Hostmore is purchasing the business at a relatively low price - just 5.4 times 2023 Ebitda - signifying the challenges it faces in rejuvenating the brand.

Expert Take

I see this bold move by Hostmore as a high-risk venture. The company’s previous financial performance and the current state of TGI Fridays make this a challenging endeavour. To turn around TGI Fridays’ fortunes, Hostmore will need to invest significantly in brand revitalisation and face stiff competition from rival firms.

However, the deal could also present an opportunity for Hostmore to diversify its operations and gain a foothold in the US market. The size of TGI Fridays’ operations and the potential to leverage the existing brand could offer significant rewards if managed correctly.