When the first TGI Fridays opened, it promised: “In here, it’s always Friday.” In recent times, the casual dining chain famous for its cocktails, hot wings and cheeseburgers has had more of a Monday feeling. The question is: has Fridays found a solution to its problems?

Hostmore, the group behind the TGI Fridays franchise in the UK, announced this week that it had reached agreement on a proposed all-paper acquisition of TGI Fridays in the US for an enterprise value of £177m.

Due to the size of the acquisition, the proposed deal would be classed as a reverse takeover under the listing rules. Hostmore called it a “highly strategic move” from management, with its shareholders set to benefit from “a material shareholding in the capital-light franchise and licensing fee business of the combined group, which achieves high margins and strong cash flow conversion”.

This is a natural fit for both businesses, it said, which would bring the two TGI Fridays back together following their separation in 2014. Since then, the US business has been majority owned by TriArtisan Capital Advisors. Hostmore said the acquisition would provide the scale, flexibility and financial stability to be able to accelerate Hostmore’s strategy, unlocking substantial earnings power that should command a higher market multiple.

The move is nothing if not bold, although the cynics will argue that, without some kind of bulking up the business would have withered. Having delivered a positive start to life as a standalone quoted company in January 2022, forecasting that full-year earnings would be “well ahead” of market forecasts, it soon began to go off the rails.

In March last year the chain sparked concern among investors after delaying its annual results pending discussions with its banks although it was adamant that that the matter was “unrelated to recent trading”.

The company, which had been demerged from Electra Private Equity, tried to muscle its way to success but even then, the backdrop was a tricky one, as economic uncertainty, rising inflation and utility costs took their toll. It pressed ahead with its planned opening programme, but that proved highly optimistic.

At the end of September, the company finally took action, pushing back the opening of new restaurants until at least 2025 to avoid spending £15m of its cash resources. It also increased its cost cutting from £5.9m to £8.2m and said it was on course to repay its bank borrowings and kick-start shareholder distributions.

The firm had in recent months parted company with its chief executive, Robert Cook, and Alan Clark, its chief financial officer, as well as its chairman Gavin Manson.

Julie McEwan, who replaced Cook as its chief executive last May after being promoted from chief operating officer, said the early success of its turnaround programme in the face of challenging conditions had created a “leaner and more focused” business.

Shares of Hostmore, which traded at 147p at its demerger from Electra Private Equity in November 2021, have not done well and despite the recent rally, remain rooted at less than 20p, valuing the company at barely £24m.

Hostmore is the brand’s biggest franchisee, with 89 restaurants in the UK, including two sites under the cocktail-led 63rd+1st brand (although the future of that sub-brand remains unclear). It has opened its first quick-service Fridays and Go in Dundee and, until its recent woes, had held talks with the US TGI Fridays over expanding into new territories. Those have evidently taken a surprising turn.

The enlarged Hostmore, which will change its name to TGI Fridays PLC, will become the franchisor for the brand, operating through franchising and licensing agreements in in the US and 43 international markets. It is also taking on direct operation of company-owned Fridays stores across the US. On top of its own 89 UK stores, it is buying a business has 100 directly-run corporate stores in addition to 493 franchised stores. Each party has about 4,400 employees.

Under the deal, which is still subject to due diligence, Hostmore shareholders emerge with a combined 36% shareholding of the enlarged company, while TGI Fridays Inc will collectively retain a 64% holding in Hostmore. The enlarged group would have generated underlying 2023 revenue of about £490m, a margin of 9%, with more than £30m of free cash flow. Total system-wide sales, including both corporate and franchised stores, total $1.4bn.

It said that, with similar franchise businesses listed in London or internationally trading at an enterprise valuation multiple of about 14 times on average, the deal “represents a significant re-rating opportunity for Hostmore shareholders”. The combined group would have “significantly increased scale as well as improved strategic, operational and financial flexibility”, although it would continue to prioritise debt reduction and shareholder returns.

Hostmore said that the enlarged group would be listed under the name TGI Fridays PLC on the London Stock Exchange’s main market, with a prospectus and shareholder circular likely to be published in the third quarter of this year.

Another change of chairman is also in the pipeline, with Stephen Welker having indicated his plan to retire at next year’s annual meeting. He would be replaced by Rohit Manocha, co-founder of TriArtisan. Weldon Spangler (one of the great names), the current TGI Fridays Inc chief executive, will continue in the same role, while Julie McEwan will retain her present role as UK chief executive.

There is already a sting in the tail, however. The announcement also indicated that current trading is far from plain sailing for Hostmore. Like-for-like sales in the first quarter declined by 7%, which it said was due mainly to reduced consumer demand across the sector, although underlying earnings in the quarter improved by £3.2m on the same quarter last year to reach £300,000.

The picture in the US was even tougher, with like-for-like sales in its US corporate stores sliding by 23% on the back of consumer belt-tightening and heavy promotional spend and discounting by key competitors. The encouraging element of current trading on both sides of the pond is that guest experience scores are on the up.

The real question is this: if, as we are told, both parties will emerge stronger and with a more secure future, does that mean TriArtisan plans to settle in for a few years, and use its big shareholding to help the enlarged company, or does it cut and run, leaving others to grapple with issues like the £294m of net debt.