On Monday, the company that was to buy TGI Fridays, the U.K.-based Hostmore, said that it would no longer buy the casual-dining chain after said chain lost control of most of its assets. Apparently, Hostmore doesn’t want a franchise business that is no longer in control of the actual franchising part of that business.
But the operator’s announcement also included this nugget: It can’t sell its TGI Fridays restaurants at enough of a valuation to fund its debt.
That particular part of the announcement led to a 91% decline in the price of Hostmore’s stock. In one fell swoop, Hostmore went from having a plan to become a global franchisor of the TGI Fridays brand into one that can’t even fund its debt by selling restaurants.
Welcome to the modern market for restaurant mergers and acquisitions.
A parade of restaurant chains are being sold at a fraction of the value of their debt. Lenders have offloaded debt at discounts, no longer believing they’ll be paid in full and not wanting to go through the cost and the hassle of a bankruptcy filing.
Private-equity firms, meanwhile, are cutting their losses and walking away from these assets.
Higher interest rates mean buyers do not have the capacity to pay as much as they had in the past. That has depressed valuations.
But, as we’ve said before, many buyers want nothing to do with operating restaurants. As such, companies with heavy restaurant operations like Red Lobster, MOD Pizza, Uncle Julio’s, Rubio’s, BurgerFi and many others get sold at rates well below their debt. Most of these deals are going to bargain-hunting investors.
TGI Fridays is a microcosm of this situation.
The chain is well-known, in the U.S. and in Europe. It at one point was the biggest casual-dining brand in the country, on par with Applebee’s and Chili’s. But it has struggled over the years as consumers have shifted toward takeout-focused options.
Fridays has a surprising number of locations outside the U.S. At the end of last year, before any store closures so far in 2024, the company had 367 international restaurants, compared with 269 in the U.S.
Hostmore is the largest such operator, with 89 such locations, according to the company’s website.
The company planned to sell those locations, while TGI Fridays sold its corporate stores, to pay off debt and emerge from the acquisition as a pure-play franchisor.
Then Citibank last week terminated Fridays as the manager of the franchise system following a handful of issues, including an overpayment of a management fee and withheld royalties. Citibank is the trustee of Fridays’ 2017 whole business securitization, in which future revenue from royalties, licensing and other assets are used to back bonds.
Citibank had the ability to do that under provisions of the securitization. This was the first manager termination since the financial crisis, which officially earns this event the title of “rare.”
But the filing made it clear that Hostemore’s own stores were having problems of their own. Same-store sales for the company’s units are down 12% so far this year.
“It is unlikely that the equity owner of Thursdays, being the company, will recover any meaningful value for its ownership,” Hostmore said. Thursdays is the name of the company that operates the TGI Fridays restaurants. Hostmore owns Thursdays.
Hostmore also explored other options for the restaurants. “None of these potential options, individually or collectively, is presently likely to provide value to the group,” the company said.
In other words, Hostmore had to back off a purchase of Fridays because Fridays lost control of the one thing Hostmore wanted, the franchise business. And then it told the company’s investors that its restaurants won’t fetch enough in a sale to pay off any of the debt.
TGI Fridays’ sales are down 39% in the U.S. since 2018, and 31% globally. But it had a buyer willing to take on the brand as a franchisor, thanks to the profitability and predictability of the franchise revenue stream. Once that revenue stream was in danger, Fridays no longer had that buyer.
The restaurant business is just not as valuable as it used to be.