TGI Fridays’ $380 million sale to Allegro Merger Corp. broke rank from recent history. Namely, it sent a restaurant chain to the public sector instead of taking it off.
When Kura Sushi raised $41 million in its initial public offering over the summer, it marked a first for a restaurant chain since Wingstop and Fogo de Chao hit the stock market in 2015. It has been far more common in recent years to see a publicly traded company, like Ruby Tuesday or Buffalo Wild Wings, head private after a takeover (NRD Capital in the first case and Roark-backed Inspire Brands in the second).
To put this in perspective, consider that, over the first nine months of 2019, per PitchBook, private-equity deal value in just the quick-service sector approached $5.35 billion. In all of 2012, it was $3.17 billion.
So, TGI Fridays’ November announcement was a headliner beyond the numbers. Allegro Merger Corp. and the casual pioneer signed a definitive agreement for “a business combination transaction”—one that would result in TGI Fridays trading on Wall Street. At closing (end of March expected), TGIF Holdings, LLC’s holders are set to receive a combination of cash and stock valued at $30 million. Allegro assumed roughly $350 million of net debt. Existing shareholders of the company could also receive up to an additional two million common shares contingent on the performance of the company.
The majority owners of TGIF exchanged a majority of their ownership in the business for shares of Allegro.
It will signal a big change. In 2014, longtime-owner Carlson Restaurants sold TGI Fridays to TriArtisan and Sentinel Partners for more than $800 million. It has been privately held since merging with Carlson 30 years ago.
But beyond the how of the deal, why Allegro and TGI Fridays joined forces has multiple layers. There are two main ones: Access to equity capital to deleverage the company’s balance sheet, and cash to accelerate its revitalization plan, and fund growth and marketing initiatives at TGI Fridays.
At the time of the agreement, TGI Fridays had 396 U.S. locations (144 company owned, 252 franchised) and 442 international franchises. There are now 831 locations after some West Coast franchise closures (446 international).
As of Q3, the chain reported revenue of roughly $350 million on systemwide sales of $2 billion. Licensing revenue came in at $13 million and off-premises sales mixed 13 percent of the total business. Adjusted EBITDA was $57 million and the average domestic net sales per store was $2.7 million, with average checks of $18 per guest (beverage included).
Yet TGI Fridays had some real, year-over-year, traffic concerns stateside headed into the sale.
Comparable traffic
2016
- Corporate: 0.1 percent
- Franchise: –7.4 percent
- International: –5.2 percent
2017
- Corporate: 1 percent
- Franchise: –2.9 percent
- International: –4.7 percent
2018
- Corporate: –10.9 percent
- Franchise: –12.1 percent
- International: –7.7 percent
2019
- Corporate: –4.5 percent
- Franchise: –6.8 percent
- International: –6.6 percent (through September 30)
Taking 2019 out of the equation, TGI Fridays’ transactions were stacking negative 15 percent on a two-year basis at franchised units. And that’s following a 7.4 percent drop. TGI Fridays’ U.S. franchise base is made up of 24 operators who own, on average, 10.5 locations apiece. The company said they average 10 years of experience with the brand. Internationally, TGI Fridays comprises 40 franchisees in 56 countries running 442 units (an average of 11.1 restaurants per owner). Aside from Mexico, all countries are operated by one franchisee.
TGI Fridays’ biggest U.S. franchisee has 66 restaurants. It goes 43, 36, 24, and 16 to round out the top five, while the other 19 account for 67 locations. Nine operators are single-unit franchisees.
The company’s top-line sales have sagged along with traffic.
Comparable same-store sales
2016
- Corporate: 0.9 percent
- Franchise: –6 percent
- International: –3.5 percent
2017
- Corporate: –2.7 percent
- Franchise: –5 percent
- International: –2.6 percent
2018
- Corporate: –2.3 percent
- Franchise: –5.8 percent
- International: –6 percent
2019 (through September 30)
- Corporate: –7.3 percent
- Franchise: –8 percent
- International: –2.9 percent
What this boils down to is Allegro’s deal, at its core, was a turnaround project. TGI Fridays said same-store sales have improved recently as new value drivers were identified in key markets. Seven areas in particular gained traction—the U.K., Middle East, Scandinavia, Philippines, Mexico, Malaysia/Indonesia, China and Australia (as one market).
The company said China, Hong Kong, and Taiwan are development targets currently, with accelerated growth planned for Spain and Brazil.
Here’s a look at how TGI Fridays sees potential international whitespace (a key to the deal’s potential). The brand said it has 82 international commitments in place today.
Mexico
- Existing units: 17
- Potential: 50
Japan
- Existing units: 14
- Potential: 40
India
- Existing units: 9
- Potential: 70 (there is new ownership here)
Brazil
- Existing units: 6
- Potential: 45
Southeast China
- Existing units: 3
- Potential: 80
Canada
- Existing units: 2
- Potential: 35
Turning back to the day-to-day business itself, though, TGI Fridays has a lot of comeback-minded initiatives in order. The brand hired Ray Blanchette in October 2018 to “drive the transformation and implement a strategy focused around improved marketing, value offerings, a revamped American bar, and solid off-premises growth,” it said.