FOLLOW THE MONEY, with Roger Lipton – Column republished from prestigious RESTAURANT FINANCE MONITOR
We are pleased to announce that we have begun writing a regular column for John Hamburger’s prestigious publication, the Restaurant Finance Monitor. Below is the first installment, published January 15th. We have posted the two pages from the publication at the bottom of this article, but the type is difficult to read so the text follows from here:
FOLLOW THE MONEY ! – WITH ROGER LIPTON !!
Roger Lipton has followed the restaurant industry for 4 decades. Founder of money management & investment banking firm, Lipton Financial Services, Inc., he publishes regularly at www.rogerlipton.com, resume’ available there at “About Roger”. He can be reached at email@example.com or 212 600 2266.
THIRD PARTY DELIVERY – WHERE ARE WE?
DoorDash has a 50% market share, Uber (with acquired Postmates) is at 33%, and Grubhub at 16% aren’t going away without a fight. DoorDash, Uber, and Grubub have $5B, $7.2B and $466M of cash, respectively, and will no doubt spend aggressively to gain market share. DoorDash is already talking about expanding its service to other consumer categories, probably going to call it an “ecosystem”. All this is taking place while consumer habits adjust, in an unknown fashion, to the post-Covid world. The third party delivery business is still very much in a state of flux. Neither the restaurant owners, the drivers, nor, most importantly, the customers are thrilled with the current model. We expect, as the competition heats up, customers to pay less, the restaurants will pay less, the drivers will get more, and profit margins for the delivery agents will be more likely to shrink than expand. Meanwhile, on Wall Street DoorDash common stock has a market valuation of $44 Billion. In the first nine months of ’20 revenues were $1.9B, up dramatically from $587M, with a loss of $131M (reduced from a $479M loss). Consensus estimates call for $3.8B and $4.8B of revenues in ’21 and ’22, moving to profit breakeven (really?) in ’22. The $44B of valuation is therefore about 9x ’22 estimated SALES. If after tax profit margins could be 10% of sales (which is an above average profit margin) that would make the P/E multiple on “aspirational” ’22 earnings a sky high 90x. It is not the first, or last, time that there is a disconnect between stock market valuations and reality.
PUNCH BOWL SOCIAL – YESTERDAY’S “HOT CONCEPT” GOES AWAY !
Punch Bowl Social. a 24,000 sq. ft. experiential concept founded in 2012 by Robert Thompson was apparently doing about $7M/unit when L Catterton bought into the 9 unit chain in 2015. A short two years later, in mid-2019, with 17 units, Cracker Barrel (CBRL) purchased about 59% of PBS’ economic interest and 49.7% of voting interest, agreeing to provide upwards of $140M. CBRL bought out L Catterton completely and allowed founder Thompson partial liquidity. With a new financially strong partner, Punch Bowl resumed their by now broadened mission to build a “lifestyle brand”. By late 2019, pre-pandemic, after closing a smaller sized location in Fort Worth, weaker performance led to a default on PB’s 2018 loan with CrowdOut LLC., which CBRL settled for $3.5M in January. No doubt the operating strain of rapid expansion of a complex product was becoming all too apparent. By March-April, 2020, with $20M of rent due, CBRL declined to guarantee a first priority loan with CrowdOut. CrowdOut replaced Thompson in August, 2020 with turnaround specialist, John Haywood but bankruptcy was filed in December. A few apparent lessons: (1) Don’t allow your reach to exceed your grasp. (2) Leverage works both ways. (3) Capital is always available when you least need it (4) Zero percent interest rates encourage both equity (Cracker Barrel) and debt (CrowdOut) investors to “reach” for a return. Punch Bowl Social is not the first or last example of “misallocation of capital.” (5) Who suffers now ? Mostly ex-store level employees.
BITCOIN: A PERPETUAL MOTION MACHINE – IT’S A WONDERFUL THING !
The Grayson Bitcoin Trust (GBTC) (to quote Bloomberg LLP) “is an open-ended grantor trust based in the U.S. The Trust’s shares are the first securities solely invested in BTC (Bitcoin).” GBTC is designed to track the Bitcoin price on a daily basis. Here’s the cool thing. GBTC has been selling for approximately a 40% premium to the value of Bitcoins in the Trust. The more shares that are bought by investors, and issued by the Trust, the more Bitcoins need to be acquired so the Trust price can properly track the Bitcoin price. The number of shares in the Trust has steadily increased, from 490,000 in late October to 639,000 as of January 6th. That means 149,000 new shares were issued and, based on the $42.80 price on 1/6, would create a demand for $6.4B worth of Bitcoin. The beautiful thing is that the Trust can use their funds to advertise, attracting new investors to GBTC, which requires more Bitcoin to be bought, which drives the Bitcoin price higher. To be sure, $6.4B worth of Bitcoin buying over a couple of months is not huge these days, and the market value of GBTC, at $27B, is a rounding error within the trillions of “investment” capital that is allocated these days. However, GBTC is growing and incremental buying in any commodity, especially on a regular basis can be Instrumental to increase the price of any commodity. I have written on my website more extensively on this subject. When books are written about the financial follies of the early twenty first century, the rise of bitcoin and thousands of other cryptocurrencies will be one of the ringing bells signifying the imminent bursting of the bubble. In 1620, a lot of smart people believed in tulips.
THE CHIPOTLE RECOVERY – CREDIT BRIAN NICCOL, BUT THE STAGE WAS SET ! – When Brian Niccol was brought in as CEO of Chipotle (CMG) in early ‘18 the stock was in the low 300s, close to its previous low eighteen months earlier in the wake of the norovirus epidemic. CMG has gone almost straight up to over $1300/sh in the last thirty six months. The Company has built its digital and delivery capabilities, introduced new products and controlled labor and food cost well, coming out of the pandemic stronger than ever. Since EPS bottomed at $6.60 per share in calendar ’17, earnings have rebounded and consensus estimates are for $21.21 in 2021 (a new high) and $28.34 in 2022. Great job, Brian ! Taking nothing away from Brian, Scott Boatwright was brought in as Chief Restaurant Officer eight months earlier, in May, 2017. Boatwright had been at Arby’s for twenty years, most recently as Senior Vice President of Operations. The dramatic turnaround at Arby’s is well known by now, and for that Roark Capital (the Private Equity owner) no doubt said “Thank you, Scott”. It’s great, therefore, that Brian recognized talent when he saw it, though he may well have previously known Scott. Together they have led the organization in a great fashion, with Boatwright no doubt the closest to store level operations. Niccol and Hartung (CFO) mostly talk to investors, but it is Boatwright where the rubber meets the road. Lastly, it should be noted that CEO of Chipotle who brought in Boatwright, and to whom Boatwright originally reported, was Chipotle’s founder and visionary, now retired Steve Ells. Perhaps Ells hadn’t lost it completely 😊
TILMAN FERTITTA COULD USE SOME HELP – HOW ABOUT HIS SPACs?
We have described many times how very low interest rates allow for inordinate amounts of debt to prop up companies to a far greater degree than would normally be possible. We’ve followed Tilman Fertitta’s rise to financial prominence ever since his Landry’s Seafood Restaurant chain become publicly held in 1993 with a valuation of $30M. Fertitta has been active ever since. The details between ’93 and ’20 are interesting, and they follow below. The most concise summary is that the 1993 owner of a modest sized group of seafood restaurants 1993 has built over 28 years a huge hospitality company that is coping, in the middle of a worldwide pandemic, with over $4 billion of debt.
Lawyers and accountants and investment bankers working for Tilman Fertitta have made a lot of money in the last 27 years.
1994 – purchased Joe’s Crab Shack
1996 – purchased the San Luis Resort, a 32-acre beachfront resort on Galveston Island
1998 – developed the 35-acre Kemah Boardwalk
2000 – purchased Rainforest Café
2002 – purchased Saltgrass Steak House, Chart House and Muer Restaurants
2003 – opened the Downtown Aquarium, a 20-acre entertainment complex in Houston, followed by other Aquarium Aquarium restaurants in Denver; Nashville and on the Kemah Boardwalk
2004 – partnered with the City of Galveston to open a 140,000 square foot convention center
2005 – purchased the Golden Nugget Hotel & Casinos in Las Vegas and Laughlin, has since opened three additional locations in Atlantic City, Biloxi, Mississippi and Lake Charles, LA
2006 – sold Joe’s Crab Shack, which had acquired Crab House and Cadillac Bar
In mid-2008, as the economy and credit markets were deteriorating, Fertitta took Landry’s private, acquiring the public’s 61% for $415M and assuming $885M in debt, making for an enterprise value of $1.3B.
The ’08-’09 crisis ran its course, interest rates continued downward and Fertitta did not rest.
2010 – purchased Bubba Gump Shrimp, Claim Jumper and Oceanaire
2011– purchased McCormick & Schmick’s and Morton’s Steakhouse
2012 – expanded entertainment division, opening the Galveston Island Pleasure Pier
2013 – acquired Mastro’s restaurants, has also bought and built Landry’s Signature Group, with Vic & Anthony’s; Grotto; Brenner’s Steakhouse; Brenner’s on the Bayou; La Griglia; and Willie G’s Seafood
2016 – purchased the BR Guest restaurant Group
2017 – purchased, again, Joe’s Crab Shack, having sold it in 2006
2019 – purchased Restaurants Unlimited, adding Skates on the Bay, Portland City Grill, Manzana Grill, Palisade, Cutters Crabhouse, Stanford’s, Henry’s Tavern, Kincaid’s, Palomino Restaurant & Bar, and Portland Seafood Company
2019 – purchased Del Frisco’s for $650 million, selling Barteca
Aggressive enough ?
CURRENTLY – FERTITTA HAS HIS HANDS FULL
Today Landry’s, Inc. owns and operates more than 600 restaurants, hotels, casinos and entertainment destinations in 35 states and the District of Columbia plus numerous international locations.
In spite of a spectacularly successful career in the dining, entertainment and gambling industries, Fertitta is clearly feeling the heat. We are not privy to the gory financial details, but debt, no matter how low the interest rates, can be a problem when an unexpected pandemic takes revenues down by more than 50%, even for a little while.
To demonstrate how quickly fortunes can turn: Fertitta had reportedly paid himself $300M in 2019 and refinanced his company’s debt so no principal would be due until 2023. Moving right along, in late 2019 he was apparently shopping a 49% stake in the Landry’s/Golden Nugget empire. The pandemic hit in March and everyone’s life changed, Fertitta’s not the least. To his credit, he has been open about the strain, said he was a “big boy”, would solve his own problems and not use government PPP funds. He re-invested $50M out of $200M he had taken out in a dividend just a few months earlier and sold $250M in company debt in April at a 15% interest rate.
Most recently, his attempts to refinance have apparently generated interest in the gaming piece, but the restaurants and destination resorts are an obvious problem. A big issue, predictably, is the debt, now about $4 billion, including $1.4B that was spent to buy the Houston Rockets basketball team. The company is apparently generating about $400M of EBITDA currently (pandemic adjusted?). In any event, quoted debt of anything like ten times EBITDA is pushing the capital raising envelope pretty far.
THE FERTITTA SPACs
With all that as background, there are of necessity some large moving pieces right now as Fertitta, said to be worth $5-6B, tries to maintain solvency for his empire. The SPAC space is hot, and enormously productive for aggressive entrepreneurs, so the three SPACs that Fertitta has recently sponsored can play an important role.
The first recent SPAC sponsored by Fertitta, Landcadia Holdings raised $250M in 2016, and ultimately bought a small food delivery company, Waitr Holdings, now trading as WTRH. This relatively small regional player has grown over the last several years, but at a much slower rate than DoorDash, Uber or Grubhub. Revenues in the current fiscal year will be about $209M , up about 10% YTY, and are estimated to grow modestly to $217M and $232M in the next two years. In contrast to most of the the larger players, WTRH has turned profitable, expected to earn $0.17/share this year and $.19 next year. However, the much smaller size and relatively unexciting growth rate has not led to a high valuation. Unfortunately for Fertitta’s near term financial needs, the stock is trading at $3.40/sh, down from the $10 IPO, and way below a price that would help much.
Fertitta’s second SPAC has done well so far. Landcadia Holdings II came public in May, 2019 at $10/unit, raising over $300M. In mid-2020, Landcadia bought the online gaming portion of Golden Nugget and (GNOG) now trades at about $20/share with an $804M market capitalization. Setting aside the pre-merger expenses, GNOG had $55M in total revenues in 2019 with operating income of $17.7M and Net Income after taxes of $11.7M. The valuation is very high, and some observers feel that GNOG is not as attractive as larger competitors such as DraftKing (DKNG, also the result of a SPAC), but the main thing for Fertitta is that the 4.1M shares that the proxy material says he and his affiliates own are worth about $80M, and should be, at least partially, liquid.
Fertitta’s third SPAC, currently looking for an acquisition, is Lancadia Holdings III (LCAYU), which raised $500 million on 10/10/20. Co-Chairman of LCAY, along with Fertitta, is Richard Handler who is currently the CEO of Jefferies, the investment banking firm that has been a constant presence throughout the creation of Fertitta’s empire. As stated, “the company plans to target the consumer, dining, hospitality, entertainment, and gaming industries, including technology companies operating in these industries”. The jury is still out on this one. It remains to be seen whether this SPAC buys into any portion of Landrys.
When I was about to write: “Tilman should write a book.” I checked Amazon and it turns out he has. The title is “Shut Up and Listen! Hard Business Truths that Will Help You Succeed”
I haven’t spoken to Tilman Fertitta in thirty years, haven’t even read his book, so I have no “axe”, but I would not bet against him. His empire would not be easily managed (or efficiently monetized) by anyone but himself. It’s been said: “If you owe the banks a million dollars, you’ve got a problem. If you (in this case) owe the banks four billion dollars they’ve got a problem”. Tilman will lose a lot of sleep, if he hasn’t already, but at the end of the day his company will function long enough for the burden of the pandemic to abate. There are trillions of dollars out there “reaching” for a yield. There will be a price, but some of that capital will most likely reach in Tilman Fertitta’s direction.
As printed in the Restaurant Finance Monitor on January 15th: