ROGER’S MONTHLY COLUMN FOR RESTAURANT FINANCE MONITOR – HIGHLIGHTS OF LAS VEGAS CONFERENCE – “THE MOOCH”, SPACs, THREE GROWTH COMPANIES
Follow The Money with Roger Lipton – November 15th Issue of Restaurant Finance Monitor
At the Restaurant Finance Conference last week: Anthony Scaramucci (aka The Mooch) provided an outstanding (and accurate) historical summary of fiscal/monetary developments over the last fifty years. I couldn’t agree more with his lack of confidence in our Federal Reserve and the likelihood that the current inflationary trends are just the beginning. He and I differ, though, when he expresses confidence in bitcoin. There are 13,000 different cryptocurrencies, and you have to report trades on your 1040 tax return. He and his clients own bitcoin but I wonder whether it is 2% or 20%, or what, of their liquid assets. My personal gold related holdings are at the top of that range.
SPACs were a major topic. Though the SPAC space has cooled off lately, there are still hundreds of SPAC IPOs that are searching for acquisitions. Actually, almost SIX HUNDRED, sitting on about $100 billion, ready to do $500 billion worth of deals. As we heard at the Conference, there are a lot of advocates, almost all of which have skin in the game, but every coin has two sides. As Warren Buffet famously said: “if you are playing poker, it’s best to know who ‘the patsy’ is”. What follows is our SPAC primer, in general terms: It is true that deals can (sometimes) get done more quickly than with traditional IPOs, but FST’s conversations with Tilman Fertitta (an admittedly more complex transaction than most) started over a year ago and the deal is not done yet. Re: risk and reward for the various participants. Original IPO investors in SPACs (at the $10 issue price) can make money immediately if the IPO is well received and they choose to book the profit. If they stay, when the business combination is proposed, they can choose to redeem, so they have had the upside with minimal risk in the meantime. The SPAC IPO underwriters love the brokerage fees, many tens of millions of dollars over just the last year or so, and they sometimes get a warrant “kicker”. The Private Investors in Public Equity (PIPE) institutional investors who provide extra capital for the business combination, have an inside look at the fundamentals, often a discounted price or warrants, and sometimes a senior security. The placement agent for the PIPE earns a commission. Most material of all (if it is a $200M IPO, selling 10M units, a share plus partial warrant at $10) the organizing “Sponsor” of the SPAC, typically starts the process by buying four million shares for $25,000 (virtually zero). The Sponsor also usually lends the SPAC organizational expenses, negotiable anywhere from six to seven figures, to be paid back from the IPO. In this example the Sponsor also agrees to invest $1.5M at the time of the business combination, to buy 1.5M warrants (exercisable at $11.50/share). The bottom line is that the Sponsor, whose organizational expenses were paid back from the IPO, has a total of $1,525,000 invested and owns 4M shares, for an average cost of $0.38/share, plus 1.5M warrants. On the upside, the Sponsor’s equity, the liquidity of which might be well down the road and depends how the operating company does, is worth $40M at $10/share, $80M at $20/share (plus $13M for the warrant value), and $20M (13x the investment) even at $5/share. On the other hand, the public and even the PIPE investors have a far different reward/risk ratio. They will make money on the upside, but at $5/share they have lost about half their capital. The last part of the SPAC equation that is worth considering: SPAC “candidates” that are well established, profitable and growing with experienced and committed management, can find their own underwriter and have no need to issue a major number of shares to a middle man that can provide services that they don’t need. This is why many of the companies (but not all) that choose to be acquired by a SPAC are either (1) very speculative but exciting (space exploration, electric vehicles, biotech, etc.) (2) companies unappealing to traditional underwriters, for one reason or another, or (3) willing to accept a SPAC valuation so high that the Sponsorship dilution doesn’t matter. If it’s too good to be true…….
Roger’s Conference Panel: I presented Huey Magoo’s, BurgerFi and FAT Brands. Each is successful, growing, raising capital in dramatically different ways. At Huey Magoo’s: CEO Andy Howard has invested five years, with “family and friends” capital and bootstrapped this small box fast casual chicken tender purveyor into a hot concept. Now twenty units, AUVs have risen something like 50% from his start at $1.2M and franchisees are lining up. The takeaway here is that nothing happens overnight, he’s got $1.2M of G&A to properly support his rapid growth, and he continues to debate if and when outside capital should be brought in. Florida based BurgerFi (BFI)came public through a SPAC about a year ago and CEO, Julio Ramirez, brought us up to date on expansion plans. Life has just recently changed at BFI with the acquisition of 61 unit Anthony’s Coal Fired Pizza. L Catterton, the previous owner of ACFP has become the largest shareholder, no doubt plans to use BFI as a public platform to own other brands, shades of Roark and their Inspire Brands. At publicly held FAT Brands, CEO Andy Wiederhorn has amassed a multi-branded franchising companies that now does $2.3B of system wide sales among sixteen brands. He has raised $744M in debt, securitized by the various royalty streams. In essence he is arbitraging the cash on cash returns from the acquisitions (Johnny Rockets, Round Table, Twin Peaks, and pending Fazoli’s in just the last fourteen months) against a lower cost of capital, providing for current positive cash flow which will be built upon as unit growth takes place. The four or five major brands within his sixteen brand portfolio appear to be predictable growth vehicles, which will presumably allow for an improved balance sheet as well as additional acquisitions.