IN “THE ROOM WHERE IT HAPPENED” – WHY DID TILMAN FERTITTA SWEETEN THE DEAL?

Outside the room where it happened, it is likely relevant that a great deal of the bloom has come off the SPAC rose. Only one of the six restaurant related SPACs has been trading above the $10 issue price and that has been Fast Acquisition Corp. (FST), which has been finalizing the proxy material relative to the pending acquisition of Tilman Fertitta’s multi-billion dollar hospitality empire (72% restaurants and hotels, 28% gaming).

Recall that shareholders in a SPAC have the right to redeem their shares at approximately the $10 issue price if they don’t approve of the suggested business combination. FST has been trading at about $12/share, which normally would be a safe premium going into the vote. However, the possibility of deal rejection may well have been of concern to both Fertitta and the FST sponsors (Doug Jacob and Sandy Beall, most prominently), particularly with the cooling off of the SPAC space, the index of which is trading down about 25% from its high earlier this year.

 With that background, and even a modest uncertainty, Fertitta decided to sweeten and insure the deal by adding 42 additional properties, including Vic and Anthony’s,The Pleasure Pier on Galveston Island, the Mastro’s steakhouse chain and his 50% of Catch Hospitality Group. Collectively these properties generate EBITDA somewhere north of $100M, depending whether we talk pre-pandemic, the current recovery phase, or post-pandemic 2022. As a result, Fertitta will end up with 72% of the post-merger FST, up from 59% previously.

The resulting EBITDA is a bit of a moving target. In early January, 2021 we wrote an article on Fertitta’s capital needs, with over $4B in debt and apparently around $400M of pandemic depressed trailing EBITDA. There has been an already material recovery in early 2021, so when the FST/Fertitta original proposal was announced a few months ago, the guidance was $648M of EBITDA in 2022. Three months later, further into the recovery and, including the additional properties, Fertitta has indicated that the prospectively enlarged company is currently (Q2’21) generating pro forma EBITDA at $270-275M for the quarter, or $800M annualized. The post-transaction Enterprise Value is estimated to be $8.6B or about 11x the current EBITDA run rate.

The new EV/EBITDA is not materially different from the original. However, a large “adjustment” as a result of the sweetened proposal is that the debt is not being increased. Fertitta’s empire has been carrying something like $4.5B of debt, to be reduced from the $200M IPO raise and privately raised equity (the PIPE) of $1.2B, leaving a new debt load of around $3B.

In The Room Where It Happened: We suspect that the institutions currently owning FST were not adequately comfortable with $3B of debt relative to the previous $648M of projected ’22 EBITDA. This transaction, both the first  proposed and last, is a great result for Fertitta, who only a year ago raised $250M at a 15% interest rate to sustain his corporate liquidity. With the hospitality industry now improving daily, he could afford to add assets sufficient to bring the current annualized EBITDA run rate close to $800M. Sounds a lot better, relative to $3B of debt, to be running at $800M today than guiding to $648M in ’22.

 Tilman Fertitta is a practical man. Already in prospect are four additional international units, and new online gaming operations in four new states. The last thing this serial acquirer needs is to be mortgaged to the hilt just as his empire becomes publicly held once again. No doubt he said to himself: “Let’s get this deal done and move forward. Who knows what tomorrow brings?”

And that’s what we would have advised.

Roger Lipton