An unlikely counterpoint to the prevailing trend of US giants buying out UK listed companies has emerged through hospitality minnow Hostmore’s (MORE) £177mn bid for US restaurant group TGI Fridays.
Hostmore was spun out from Electra Private Equity in November 2021 and hasn’t exactly been a roaring success since. Shares in the company, which operates the UK franchise of TGI Fridays, have dropped by more than 80 per cent since its market debut and it currently has a market cap of under £24mn. It has also been loss-making and generates hardly any free cash flow from its 89-store chain. Full-year accounts for 2023 have yet to be published but summary figures pulled out for 2023 show that it made a cash profit of just £2mn on revenue of £191mn last year – a decline of 94 per cent and 2 per cent, respectively, on the prior year. It had a free cash outflow of £3mn.
The one thing it does have, however, is a lighter debt burden than the US-based master franchisor, whose net debt of $171mn (£134mn) equates to around 4.2-times its cash profit of $41mn, or 12.3-times the $31mn free cash flow it generated last year. It operates 100 company-owned stores in the US and franchises almost 500 more in 43 different international markets. Employee numbers for the two groups are fairly similar, with around 4,400 people working in each.
Given their relative size, the all-share deal is effectively a reverse takeover, with Hostmore shareholders ending up with 36 per cent of an enlarged group that would have revenue of around £490mn and free cash flow of £30mn, the company said. Its net debt would balloon to almost £160mn, though. TGI Fridays’ current shareholders, including private equity firm TriArtisan and hedge fund MFP Partners, would hold the remainder of the shares but the business would continue to be run by Hostmore’s management.
Chair Stephen Welker said the deal would reunite two businesses that “are a natural fit”, given they were part of the same group until as recently as 2014.
Hostmore had made good progress on its turnaround and this deal offers scale and flexibility benefits, as well as the prospect of enhancing shareholder returns, he argued.
Others are a little more sceptical, though.
TGI Fridays is “arguably one of the most tired brands on the market”, said AJ Bell’s head of financial analysis, Danni Hewson. The most recent quarterly trading figures for the US business show an 11 per cent decline in revenue, with rivals using big discounts to attract custom, Hewson added.
“This poor situation is arguably reflected in the price being paid for the business – just 5.4 times 2023 Ebitda,” Hewson said. “Hostmore will have a lot of work to resurrect the brand. The big question for investors is whether it’s worth the effort.”
