Allegro Merger Corp. (ALGR), took the unusual step today of posting their 8-K submission and presentation on the Allegro Merger Corp. website. These documents apparently should have been filed with the SEC on Friday afternoon, in tandem with their press release announcing their combination with TGI Fridays. However, there was a technical glitch of sorts and since today is Veteran’s Day (a bank holiday), they won’t have the ability to get it filed on the SEC website until tomorrow. Although, their conference call this morning went ahead as scheduled.
With the release of those additional materials, a few key pieces of information have now been provided. For one, as previously stated, the consideration of $30 million to TGIF will be in mix of cash and stock . However, thanks to the new filings, the mix of cash and stock will be determined by the equityholders, but at least 40% of the aggregate consideration must be in stock, or $12 million worth. Additionally, Cowen will be receiving a “Facilitation Fee” in a cash amount equal to $3.8 million, plus 796,875 Founder Shares. But, Cowen can also receive an additional 478,125 Founder Shares if Allegro needs to do a PIPE or locate additional investors to satisfy the minimum cash condition at closing. By the way, that minimum cash condition is $30 million, after transaction expenses, the Facilitation Fee, redemptions and any loans (up to $1.5 million). Furthermore, if the transaction does not close by March 31, 2020, either Allegro or TGIF can terminate their agreement.
With the above in mind, what else can we determine from the newly released materials? For one thing, Cowen’s additional Founder Shares, as part of their “Faciliation Fee”, is predicated on the possibility of a future PIPE, so the fact that’s it’s already built-in, means that it’s certainly on the table. However, it’s unclear what this “Facilitation Fee” is for. After all, Cantor and Piper Jaffray are already listed as Capital Markets Advisors and Cowen wasn’t an underwriter for Allegro at IPO. However, a $3.8 million fee + a big chunk of Founder Shares would indicate something significant. Perhaps this is a “Finders Fee” by another name. We’ll need to get clarity on that.
Additionally, that minimum cash closing condition of $30 million is rather small for a de-leveraging transaction. Per the presentation, $100 million of the cash in trust (assuming no shares are redeemed) would reduce TGI Friday’s amount outstanding on its loan facility by ~$100 million (currently, there is ~$360 million outstanding on their loan facility which would decrease to ~$240 million after the merger). Does this deal still make sense with only $30 million cash? Well, TriArtisan Capital Advisors LLC (54% holder) bought TGI Fridays for more than $800 million back in 2014, six years ago, so they are certainly motivated to make a public exit. So is MFP Investors LLC, the family office of Michael F Price, which is a ~40% holder. However, the enterprise value at closing for Allegro/TGIF is anticipated to be just $448.3 million, which is VERY different than $800 million.
Regardless, the casual dinning sector has been struggling as of late. In fact, Leo Holdings Corp. (LHC), previously announced a deal with Chuck E. Cheese, but wound up terminating the definitive agreement. Times have changed and a casual sit-down dinner doesn’t really work in the era of vegan, gluten-free, over-worked people with no-time for a sit down meal. Nonetheless, part of TGI Friday’s strategy going forward is a re-launch of a more “bar-centric” offering with an additional concentration on “take-out” via third party delivery services. Whether that’s a winning strategy or not will require the input from a casual-dining expert.
Something else to keep in mind, Allegro has 14.95 million Rights and as we’ve seen, Rights Shares upon conversion at combination closing can exacerbate issues if a deal is on the bubble or not well-received. Furthermore, that $10.16 trust value price found in the presentation is based on the amount in Allegro’s trust at June 30, 2019, so it’s a little old.
In summary, Cowen is most likely going to earn those additional Founder Shares via a new PIPE, but Cowen and the other capital markets advisors (Cantor and Piper Jaffray) are going to have their work cut out for them. And any new investors are probably not going to be too happy with all those Rights outstanding, so maybe we’ll get a “Rights clean-up” too, similar to what GigCapital is doing. All told, this is probably going to be a heavy lift for marketing this deal. Stay tuned for further developments.