FAT Brands: Strategic Spin-Offs and Governance Overhaul as Catalysts for Debt Reduction and Value Creation

In the high-stakes world of franchising, where debt-laden companies often teeter between survival and reinvention, FAT Brands Inc. (NASDAQ: FAT) has embarked on a bold dual strategy: spinning off its most valuable asset and overhauling its corporate governance. For investors, the question is whether these moves can transform a company burdened by $1.48 billion in debt into a sustainable, value-creating entity. The answer lies in the interplay between strategic asset separation, governance reforms, and the inherent scalability of its franchise model.

The Twin Peaks Spin-Off: A Liquidity Lifeline

FAT Brands' most significant move in 2025 was the spin-off of Twin Hospitality Group Inc. (TWNP), the parent company of the Twin Peaks restaurant chain. By distributing 5% of TWNP's Class A shares to shareholders in January 2025, FAT Brands unlocked $50 million in immediate liquidity while retaining 85% ownership of the entity. This transaction not only reduced its debt burden from $1.2 billion to $800 million but also positioned Twin Peaks as a standalone public company with its own capital-raising capabilities.

The spin-off aligns with FAT Brands' broader refranchising strategy. By planning to convert 57 company-owned Fazoli's locations to franchisees, the company aims to reduce overhead costs by $2.5 million annually and shift to a nearly 100% franchised model. Franchising, while less capital-intensive, offers higher margins and aligns with FAT Brands' goal of becoming a pure-play franchise developer. The success of this strategy hinges on TWNP's ability to attract equity investment—$75–$100 million is targeted for 2025, with $75 million earmarked for debt reduction. However, market volatility has delayed this capital raise, introducing near-term uncertainty.

Governance Reforms: A Shield Against Recurrence

Parallel to its financial restructuring, FAT Brands has addressed governance concerns through a settlement of two stockholder derivative lawsuits. The August 2025 agreement, which resolved claims tied to its 2020 merger with Fog Cutter Capital Group and 2021 recapitalization, mandates unspecified corporate governance improvements. While the specifics remain opaque, the settlement includes $10 million in insurer contributions and 200,000 TWNP shares from Fog Cutter Holdings.

These changes are critical for long-term credibility. The lawsuits had previously drained $30 million in legal costs, a burden that now redirects to debt reduction and operational efficiency. Enhanced board oversight and compliance mechanisms, though not detailed, are expected to mitigate future conflicts of interest and improve transparency. For investors, this signals a shift from reactive crisis management to proactive governance, a prerequisite for restoring trust in a company with a history of contentious capital decisions.

Balancing Debt and Growth: A High-Wire Act

FAT Brands' debt load remains a double-edged sword. While its $1.48 billion in liabilities is a drag on earnings (its EV/EBITDA ratio of 134.38x suggests overvaluation), the company's focus on deleveraging is gaining traction. Refinancing of securitization silos, cost-cutting measures (saving $5 million annually in SG&A), and the refranchising of Fazoli's are all steps toward a cash-flow-positive position. The key metric to watch is the company's ability to convert these initiatives into consistent free cash flow, which would justify its high-growth narrative.

Investment Implications: Cautious Optimism

For long-term investors, FAT Brands presents a high-risk, high-reward proposition. The spin-off of TWNP and governance reforms are structural positives, but execution risks persist. The success of the $75–$100 million equity raise for TWNP will determine whether the company can meaningfully reduce its debt. Additionally, the refranchising of Fazoli's and the conversion of Smokey Bones locations into Twin Peaks lodges must generate sufficient returns to offset the company's heavy leverage.

A critical test will be FAT Brands' ability to maintain its unit development momentum. In 2024, it opened 92 new locations, and 2025 targets exceed 100. Co-branding initiatives, such as tri-branded locations combining Round Table Pizza and Marble Slab Creamery, could drive cross-promotion and foot traffic. However, these efforts must translate into EBITDA growth to justify the company's lofty valuation multiples.

Conclusion: A Calculated Bet on Franchise Resilience

FAT Brands' strategic spin-off and governance overhaul are compelling catalysts for debt reduction and value unlocking. While the company's high-debt model remains a vulnerability, its focus on franchising—where margins and scalability are superior to company-owned operations—positions it to capitalize on the sector's long-term trends. Investors willing to tolerate near-term volatility may find opportunity in a company that is repositioning itself as a leaner, more transparent franchise developer. However, success hinges on the execution of its capital-raising plans and the ability to sustain unit growth without overleveraging. For now, FAT Brands is a speculative play best suited for risk-tolerant investors with a multi-year horizon.