Shares in the UK operator of cocktail bar chain TGI Fridays closed down nearly 20% after its plans for a major acquisition in the US were delayed and the firm announced it was working with advisers on other options to "secure value" for the business, should the deal not go ahead.
The delay emerged as Hostmore revealed plans to sell properties and introduce a franchise model to free up capital.
Hostmore announced plans to acquire US-themed casual dining brand TGI Fridays from its New York-based private equity owner, TriArtisan Capital Advisors, for nearly £180 million in April. The reverse takeover would see shareholders in Hostmore, which has around 90 outlets in the UK, hold 36% of the enlarged company, with TGI Fridays’ investors holding 64%. The proposed deal valued TGI Fridays at £177m.
However, Hostmore said yesterday that the deal would not now complete by the end of quarter three this year as previously announced.
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Hostmore previously said completion of a refinancing of the combined group had been a prerequisite to entering into binding terms for the acquisition. But it noted yesterday that by selling its stores and moving to a “capital light” franchise model, the ongoing funding requirements of the combined group will be “significantly reduced and, therefore, a new long-term debt financing package is no longer the preferred outcome.
“Instead, the parties are in discussions with their lenders and other stakeholders to repay or reduce existing indebtedness using proceeds from the sale of corporate stores and/ or new facilities from related parties,” the company said in a statement to the stock market.
Hostmore said its new structure would involve TGI Fridays’ 92 existing corporate stores and its 87 UK outlets being sold to existing or new franchisees, who would then operate the venues and pay a royalty to the combined group. It noted that the transition has started, with TGI Fridays having entered into agreements a “substantial proportion” of its stores for more than $40m.
However, it said the shift to the new plan would have a knock-on effect on the timescale of the acquisition.
“This revised business model and financing structure, while ultimately more cost-effective and accretive to shareholder value, involves a longer timeline than the third-party refinancing process that had been commenced earlier in the year,” Hostmore said.
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“As a result, the acquisition, assuming terms are agreed, will likely not close by the end of Q3 2024 as previously announced. The board and TGI Fridays continue to work closely and collaboratively towards a positive result, as the boards of both businesses believe that the acquisition is the optimal outcome for both sets of shareholders.
“In addition to undertaking a sale process for the group's corporate stores as a part of the acquisition, the board is working with advisers to evaluate other potential options to secure value for the group should the acquisition ultimately not complete (the "strategic review").
“A further update on the acquisition and the strategic review will be provided in due course.”
Hostmore reported like-for-like sales had fallen by 10% in the first half of this year, and had plunged by 20% in the final two weeks of June. Those weeks coincided with the Euro 2024 international football tournament and “unseasonably warm weather, both of which had a similar effect on the group’s competitors in the casual dining sector”.
Hostmore added that these conditions continued into July, resulting in like for like sales declining by 23% in the first three weeks of the month. This took year-to-date like-for-like sales to a decline of 12% compared with the same period last year.
The group reported an underlying loss of £1.2m for the first half, a £2.6m improvement on the £3.8m loss at the same time last year.
Net debt at the end of the first half had risen to £29.7m from £25.1m on December 31 and Hostmore warned it was in talks to raise additional finance.
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“The board continues to expect that the group's standalone peak net debt for the year, without giving effect to the closing of the acquisition or any sales of the group's corporate stores, will occur around the end of Q3 2024 due to routine working capital outflows, lower revenues in the period, and payment of transaction fees relating to the acquisition,” Hostmore said.
“Borrowings during this period are likely to exceed the group's existing borrowing capacity and so, as a part of the strategic review, the board is in discussions with various parties regarding additional financing.”
Shares in Hostmore closed down 18.91%, or 2.85p, at 12.23p.
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