Hostmore, the U.K.-based operator of TGI Fridays, said on Monday that is backing off its planned purchase of the casual-dining operator after Fridays lost control of most of its assets.
A trustee on Fridays’ asset-backed securities declared a “manager termination event” last week, a rare instance in which the manager of a whole business securitization is terminated and control of much of the business is handed over to a backup.
A whole business securitization, or WBS, is a financing mechanism in which future assets, such as royalties and licensing revenue, are used to finance bonds. Fridays used a WBS in 2017 and had a $375 million security remaining from that financing.
Fridays used future royalties and licensing revenue to back those bonds. Hostmore in a statement on Monday said the termination means a backup manager now has control over Fridays’ royalty stream, the primary reason it wanted to buy the company.
“The termination compromises the control over the royalty stream of TGI Fridays and also potentially impairs future revenue of the business,” Hostmore said. “The predictable and highly cash generative royalty stream of TGI Fridays was the primary attractive feature for the group in pursuing the acquisition.”
Hostmore said that it is willing to re-engage in discussions “if circumstances warrant.”
Hostmore is Fridays’ largest operator and announced a deal to buy the chain for $220 million earlier this year. That deal was amended last month when the two sides decided to sell restaurants to franchisees, which would help pay off debt and make the company a pure-play franchisor.
But Citibank, the trustee on Fridays’ WBS, handed control of many of the company’s business functions to a consultant, at least temporarily. It was the first time a termination took place on a WBS since the financial crisis, according to the bond ratings agency Kroll.
The ratings agency Standard & Poor’s cited several factors, notably a $2 million overpayment of a management fee for that securitization that was subsequently used to pay some vendors’ past-due accounts. The agency also said the casual-dining chain was withholding royalties from sublicensing agreements and its own corporate locations.
Both the termination, and the end of the sale to Hostmore, come at a crucial time for Fridays, whose sales appear to be in a tailspin. The company, which operates or franchises some 600 restaurants globally, watched system sales fall 15% last year, according to Restaurant Business sister company Technomic.
Those sales appear to be worsening this year. In its statement, Hostmore said same-store sales are down 23% in the first three weeks of July. So far this year those sales are down 12%.
Hostmore has been looking to sell its restaurants. But after talking with potential buyers, the company said that the price for those restaurants was likely to be lower than the value of the company’s debt.
“It is unlikely” that the company “will recover any meaningful value for its ownership,” Hostmore said, noting that the sale is expected to be complete this month. A strategic review also indicated that other options were unlikely to provide value to the group.
The combination of news on the sale and the fact that the restaurants will likely be sold for less than the value of their debt sent shares of Hostmore plunging on Monday: They fell 91%. Hostmore is publicly traded in the U.K.
UPDATE: This story has been updated to include Hostmore's stock price information.
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