All posts by Roger Lipton

DISRUPTION WITHIN THE BANKING INDUSTRY – BRIEFLY, THE BEST DISCUSSION WE’VE SEEN OR HEARD

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Capital markets have been very volatile this week, with a great deal of discussion regarding the disruption within the banking industry. A very informative article hit our desk this morning, explaining better than we could what is going on. We have provided excerpts below. While the capital markets, which have been very volatile the last few days may have already discounted the fundamentals (who can tell?) the long term problems are not going to be solved quickly. Be careful out there!

Excerpted from: Myrmikan Research, as of 3/15/23

“SVB Financial Group was banker to the Silicon Valley start-up industry and captured
a large portion of venture-bound funds, with deposits soaring from $62 billion at the
end of 2019 to $173 billion by the end of 2022. The bank attracted these cash balances
in part because it offered founders special perks. Its website still advertises: “We offer
financing to accommodate: Private aircraft financing; Ownership stake in a private or
public company; Ownership in Venture Capital or Private Equity fund.”1 SVB’s balance
sheet includes $9 billion of loans against private residences, $9 billion backed by income
from “innovation sector” business loans, and $1.6 billion against “premium wine.”
Founders who took advantage of these perks were required to maintain their
corporate cash balances at SVB. Whereas individuals rarely hold more than the $250,000
balance covered by FDIC insurance, corporations hold millions to fund working capital
and, in the case of venture companies, to hold their development capital.

“As a result, of the$173 billion in deposits, $165 billion were uninsured.

“….in this story, the culprit was the bond portfolio. The sudden influx of deposits from the Fed’s QE had given SVB little time to look for loans, so they used the funds to buy bonds instead. As of the end of 2022, SVB held $117 billion in securities, mostly securitized mortgages purchased from quasi-government agencies (like Fannie Mae). These are AAA rated bonds with virtually no default risk, the kind of investments that regulators want banks to own. SVB held its securities in two buckets: available for sale (AFS) and held to maturity (HTM).

“The Fed’s rapid tightening of financial conditions sharply curtailed the market’s appetite to fund venture companies: shrinking money supply reduces the quantity of available dollars, and higher interest rates entices capital in other directions. SVB began to see deposits fall as its customers spent their development dollars, requiring it to raise liquidity. On Wednesday, March 8, the bank announced a $21 billion sale of AFS securities in which it realized a loss of $1.8 billion “after-tax” (the assumption being that the loss would reduce income taxes—but, of course, there will be no income taxes this year). The
bank also announced plans to plug the capital hole by raising $1.75 billion in equity.

“Presumably it was the equity offering that prompted investors to read the bank’s
recently filed 2022 10-K, which revealed that the bank held $91 billion in its HTM bucket,
$86 billion of which had maturities stretching out at least ten years with a weighted
average yield of just 1.63%. The unrealized loss of $15 billion was only slightly less than
the reported $16 billion in net equity. Interest rates have continued climbing since, and
bond prices falling, which rendered the bank insolvent. It probably did not help matters.

“Sunday morning, Treasury Secretary Janet Yellen told CBS News: “During the
financial crisis, there were investors and owners of systemic large banks that were
bailed out . . . and the reforms that have been put in place means we are not going to do
that again.”  But then they did do it again. A few hours later, right after Asian markets
opened, the Treasury announced that all SVB depositors would be made whole and have
immediate access to their funds.

“The bailout was arranged by the Federal’s Reserve new facility, the BTFP (Bank
Term Funding Program). Under the program, Banks can borrow 100% of the face value of
U.S. Treasuries, agency debt, and mortgage-backed securities for up to a year at no cost. In
other words, although the market now properly prices long-dated Treasuries at 70 cents
on the dollar, the Fed will lend a full dollar for up to year. The idea is that if depositors
are assured that banks can meet their withdrawal requests despite large mark-to-market
losses on the banks’ balance sheets, they will leave their deposits in place.
The Fed’s actions may solve a liquidity problem temporarily, but it does nothing
to address the cash flow and solvency problems.

“Let’s think about what happens next: to meet the withdrawals, smaller banks will
have to pledge their underwater bonds to the Fed for cash. The large banks will get deposit
inflows, enabling them to keep their interest rates low while using the funds to purchase
high-yielding, short-term Treasuries, boosting their market share and profitability.
What could entice deposits back to small banks? Banks cannot raise deposit rates
without locking in negative cash flow.

“What happens after a year if banks cannot repay the BTFP facility, especially as their loan book deteriorates due to the looming recession?  if the banks fail, then a year from now it will be seen
that the Fed was purchasing Treasuries and MBSs at prices that imply 1.5% interest rates, not 5%.
The market has, of course, anticipated all this already. In a single day, the yield on
the 6-month Treasuries plunged from 5.17% to 4.81%. Even more impressive, the 2-year
plunged from 4.6% to 4.0%. These movements anticipate that the Fed is done hiking
though also take some of the pressure off mark-to-market losses.

“These events are setting gold up for another epic run.

“Now inflation is still running at 6%, yet the Fed has already rolled out a new QE to support bank balance sheets. The oncoming recession, caused by liquidating malinvestments made during the boom, will put even more pressure on the banking system. And at some point insurance companies and pension funds will start to fail if the Fed keeps rates high. From a geopolitical perspective, only U.S. banks are eligible to use the BTFP. Non-U.S. banks active in the eurodollar market who may be in a similar situation as SVB are on their own. Notably, Credit Suisse has been teetering on failure for the past few months, if
the market for its credit default swaps are at all accurate. Its shares traded down 29% this morning as the market bets it will not survive, which would all but force the Fed to reopen massive swap lines with the ECB. The U.S. rates market, which last week was projecting the fed funds rate would be 0.6% higher by September, is now pricing in 0.6% of cuts by then. Nor should it be lost on the market that the Fed itself is essentially a giant SVB: it purchased trillions of dollars of fixed-rate securities at ridiculously low interest rates and is now carrying enormous unrealized losses. Since its own deposit rate—what it pays
on reserves and on its reverse repo facility—reflects the Treasury rate, it also has large operational losses, previewing what is in store for the private banking system.

“Powell has lost. Like Arthur Burns in the 1970s, he has discovered that abruptly higher
rates threaten stability long before retail prices stop rising. At this point, it is hard to know
which is better for gold: more rate hikes that accelerate a major banking crisis or a pivot to
more money printing now.”

All of the above supports the tune that we have been singing for over ten years. In one form or another we have said:

“Twelve years of interest rate suppression causes all sorts of unintended consequences”.

“For every action there is an equal and opposite reaction”.

“Suppressed interest rates drive individuals and institutions to ‘reach for yield’, which inevitably ends badly”.

“Suppressed interest rates are guaranteed to encourage “misallocation of capital”.

“Interest rates are the business world’s economic ‘pituitary gland’, governing (rather than bodily functions) economic activity by way of reward/risk relationships. When nature is interfered with,  bad things happen. The purchase of zero interest fixed income securities, which has been the case for over a decade, is like investing with ‘risk and no reward’, as opposed to high reward and low risk.”

Roger Lipton

FAST ACQUISITION CORP II moves forward, TO ACQUIRE FALCON’S BEYOND, WITH SIGNIFICANT POSITIVE NEWS JUST THIS MORNING

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IMPORTANT ANNOUNCEMENT THIS MORNING: We provide below the headline, a link to the full announcement, and several “highlight” paragraphs.

SIMON PHILIPS JOINS GLOBAL ENTERTAINMENT POWERHOUSE, FALCON’S BEYOND, AS  PRESIDENT – FORMER DISNEY, MARVEL AND MOONBUG EXECUTIVE ASSUMES LEADERSHIP ROLE TO BOLSTER FALCON’S BEYOND INNOVATION IN ENTERTAINMENT

Link to the full release:

https://www.businesswire.com/news/home/20230310005308/en/

“As President, Philips will oversee the future growth and expansion of entertainment-based business and development of the company’s IPs. This will include developing and implementing comprehensive corporate strategies for future growth across all commercial operations of the company and its wholly owned subsidiaries. Leveraging his deep industry expertise and relationships, Philips will also focus on strategically building the infrastructure of new consumer products and entertainment content.

“When I became Senior Advisor to the Board last year, I commented that Falcon’s Beyond is playing in a vast sandbox. Since last year, I have been so impressed with the Company’s mark on the industry. This is a terrific time to join the team for what we expect to be explosive growth in the industry,” said Simon Philips. “I appreciate the opportunity to bring more than 30 years of experience and insight to Falcon’s and am thrilled about the abundant opportunities we will pursue together.”

“Simon’s reputation and acclaim in entertainment has been truly inspirational for me and the greater Falcon’s team,” said Cecil D. Magpuri. “His visionary cross-channel approach to brand expansion will further strengthen our own IP Expander flywheel. We feel incredibly fortunate to have found someone of Simon’s caliber whose values are so perfectly aligned with Falcon’s culture.”

“Among his many accomplishments, Philips previously served as president of Marvel Entertainment International, where he was a member of the leadership team that helped build Marvel into an internationally renowned brand and pave the way for its sale to Disney. He later became Executive Vice-President & General Manager, The Walt Disney Company, Europe, the Middle East & Africa, where his strategic approach to bringing to life iconic brands from across the Disney, Star Wars, Pixar and Marvel portfolio through licensing generated more than $16 billion in annual sales.”

THE FOLLOWING IS THE UPDATE  PREVIOUSLY PREPARED:

FAST ACQUISITION CORP II (FZT.U) MERGER WITH FALCON’S BEYOND MOVES FORWARD – S-4 FILED – SPAC STRUCTURE IMPROVED FURTHER AND FUNDAMENTALS CONTINUE TO BE PROMISING – THE UPSIDE HERE IS SUBSTANTIAL! – OUR UPDATE!

Introduction: This proposed transaction was announced on 7/12/22. We’ve followed the professional careers within the FAST II Sponsorship group for many years, were initially intrigued with their creativity in terms of improving the typical SPAC structure, and informed our readers accordingly on 7/28/22. In September we visited the first joint venture site in Punta Cana (which we wrote about here on 9/20/22. Based on the recently filed S-4 and a new Investor Presentation (elements of which are provided below) we remain enthused about the long term prospects for this unique Company. Importantly: since the normal redemption hurdle has been removed from this situation, this deal will print!

In the briefest possible form, the Company is introduced just below in fifty-nine seconds

( https://vimeo.com/570417222 ) (point & click, point & click on link)

THE SPAC – AN IMPROVED STRUCTURE

The original SPAC structure was improved, as we described last July, and has been further adjusted to reduce the risk for public shareholders. The latest version, as described below, provides reward to the Sponsors based on capital raising results, to the operators based on their fundamental success, and protects the public shareholders if the first two stakeholders don’t perform as projected.

FAST ACQUISITION CORP. II to merge with FALCON’S BEYOND

FAST Acquisition Corp. II (FZT) raised $222M to utilize in acquiring a company in the hospitality industry.  The Sponsorship group and proposed Board of Directors have outstanding brand building credentials in the hospitality/restaurant/retail industries. Included are &vest’s Doug Jacob (co-founder of &vest), Bill Hinman (partner of &vest and former Director of the SEC’s Division of Corporate Finance), Sandy Beall (partner of &vest, founder of Ruby Tuesday’s, founder of Blackberry Farm and Blackberry Mountain) and others.

FAST II is proposing the acquisition of well-established Falcon’s Beyond, an Orlando, FL based fully integrated, experiential entertainment enterprise with a collection of both Brick & Mortar and Intellectual Property assets. The principals at Falcon’s Beyond have unquestionable creative and operating credentials. The Executive Chairman of Falcon’s Beyond is Scott Demerau, founder in 2007 of the House of Katmandu in Mallorca, Spain, which became a model for successful theme parks worldwide. In 2012 he established a 50/50 Joint Venture with Meliá Hotels International, which operates more than 380 resort properties across over 40 countries. The CEO of Falcon’s Beyond is Cecil D. Magpuri, who founded in 2000 predecessor Falcon’s Treehouse, which has designed, master planned and helped to execute over $100 billion worth of hospitality/entertainment venues worldwide. In addition to Falcon’s Creative Group that designs the projects, and Falcon’s Beyond Destinations that implements the plans and owns the hotels, theme parks and retail destinations, there is Falcon’s Brands that will deploy proprietary and partnered brands across entertainment and consumer product categories. Among the expected public Board Members of Falcon’s Beyond is Simon Philips, previously General Manager of The Walt Disney Company EMEA and President of Marvel Entertainment.

The broad objective of the newly public Falcon’s Beyond will be to produce operating cash flow, at the same time building for themselves brick and mortar, as well as intellectual property, just as they have created, planned and built for others over the last twenty-two years.

SUMMARY OF DEAL TERMS AND STARTING VALUATION

We will describe the deal terms and valuation in greater detail below but the post-deal “base case” valuation, at $10.00/share, will be about $620M, implying a modest 4.7x 2025 estimated base case EBITDA (17.3x 2024 est. EBITDA). Including performance incentives, the post deal valuation would be $1.02B, or 7.7x base case 2025 EBITDA (28.4x 2024 EBITDA).  Importantly, the principals of Falcon Beyond are merging their entire professional careers into this venture, as well as providing $60M to the Melia’ transaction, and will own about 68% of the pro forma common equity with their existing shareholder base.

Critically, though there was an operating loss during the last twelve months of organizational activities at Falcon’s Beyond, there should be positive earnings and cash flow in short order, since the Falcon’s Creative Group has tangible visibility to provide $755M of goods and services over 4-5 years. The cash flow generation from Creative should help to fund the capital needs of Destination’s brick and mortar effort, with the most recent Meliá JV project (Katmandu Park in Punta Cana) opening on March 15th, 2023, and two more locations to follow during ’24 and ’25. Longer term, the potential from building Brands’ proprietary Intellectual Property is expected to be a substantial third leg of Falcon’s unique position in hospitality/entertainment and represents significant upside to investors.

FALCON’S BEYOND – A HISTORICAL OVERVIEW

Executive Chairman, Scott Demerau, has spent decades building and operating themed entertainment facilities, both in the US and abroad.  In 2007 he founded the House of Katmandu, a relatively small theme park adjacent to one of  Meliá’s hotel properties, in Mallorca, Spain. Katmandu’s success, accompanied by a dramatic improvement in room rates and occupancy at the hotel, encouraged Meliá and Demerau to expand the Mallorca site into a 50-50 jointly owned Katmandu Park & Resort venture. In the course of Demerau’s activities, at Katmandu and elsewhere, he used the creative services of Cecil Magpuri, CEO of then Falcon’s Treehouse, formed in 2000. Prior to Falcon’s, Cecil had been Creative Director at Universal Studios and directed several projects like Apollo13, The Ride, Twister: Ride it Out! Over the last twenty-three years, Falcon’s Treehouse has had a master plan and execution role in over $100B worth of destination themed entertainment projects.

In 2021, Demerau and Magpuri merged their companies to create Falcon’s Beyond.

Another 2:26 minutes, broadly describing Falcon’s Beyond:

https://vimeo.com/641310306   – (point & click, point & click on link)

BRIEF DESCRIPTION of FALCON’S BEYOND – THREE SEGMENTS (CREATIVE, DESTINATIONS, AND BRANDS)

Short to intermediate term, Creative and Destinations will be fifty-fifty contributors to the results. Longer term Brands, and its ability to develop valuable intellectual property, is expected to be an equal third leg and therefore represents further upside for investors.

Falcon’s Creative Group, led by CEO, Cecil Magpuri, in addition to supporting three internal projects (Punta Cana, Tenerife and Playa del Carmen), is currently executing the master planning work for five third party theme park locations. These five parks will include the design of over 100 attractions, the media production for over 19 attractions, as well as procurement of necessary hardware. This backlog of scope (including $100M for the Destination/Meliá JV) will amount to about $755M of billing over 4-5 years, and, based on indicated margins, should generate EBITDA of about $158M. Creative has a continued collaboration with Saudi Arabia’s Qiddiya Investment Company after Creative successfully led the design of 26 assets within an early portion of a new entertainment district called Qiddiya. Creative began work on Qiddiya in 2018 on this very long-term project that will encompass 367 square kilometers (19×19 km.,11×11 mi.). The expected operating profit within Creative should generate cash flow for investment in the brick & mortar at Falcon’s Beyond Destinations as well as buy time for Falcon’s Beyond Brands to monetize their asset light efforts.

Below: videos – 3 of $100B worth of projects – (point & click, point & click on link)

BaNa Hills Mountain Resort in Da Nang, Vietnam on Vimeo

Making-of Becoming Jane: The Evolution of Dr. Jane Goodall at National Geographic Museum on Vimeo

https://vimeo.com/279458337   Atlantis Sanya – China’s premier Underwater World

Falcon’s Beyond Destinations will be capitalizing on the potential of the joint venture with Meliá Hotels International, owner and operator of about 380 resort hotels worldwide. In most anticipated locations Meliá plans to contribute an existing hotel to each project within the 50-50 joint venture and Destination provides the capital for the Katmandu Park (owned 50-50) as well as the 100% Destination owned Falcon’s Central entertainment and food center. The first major JV project is in Punta Cana, Dominican Republic, currently soft-opened and with a grand opening scheduled for March 15th. The hotel planned to be contributed to the JV is already rated as a top hotel in Punta Cana.  The next completed joint location will be at Tenerife, in the Canary Islands, where the JV’s existing hotel is to be renovated in 2024, and the Park and Falcon’s Central opened by mid-2025. The following spot is at Playa del Carmen, in Mexico, Falcon’s Central to open in early 2025, the Park by mid-2025and the hotel by mid-2026.

The Investor Presentation indicates that Falcon’s Beyond “base case” EBITDA is estimated in 2025 at $131M, a combination of Creative’s effort as well as cash flow from Mallorca (already part of the JV), Punta Cana (Katmandu Park already soft-opened), Tenerife (where the JV already owns a hotel), which will come on stream during 2025, and the Falcon’s Central portion of Playa del Carmen which will open in early 2025.

Falcon’s Beyond Brands is focusing on expansion, execution and monetization of proprietary as well as partnered brands. Brands, consumer products and entertainment content can all be licensed, just as proprietary existing brands such as Katmandu, Cadim, the Monster Wave and VQuarium. In conjunction with Creative and Destination, as well as 3rd party partnerships with BRON Studios, Moonbug Entertainment, PBS Kids, Epic Story Media and others, this is an asset light effort that could be very substantial over time. Management estimates that Creative and Destinations will contribute 50% each to EBITDA for the next two years, but each division could contribute about 33% longer term.

CONCLUSION:

From what we now know, having studied and physically visited this situation over the past eight months, it seems at this point that success is more a question of how much and when, rather than if. Another important consideration at this juncture is that the latest SPAC structural change calls for no redemption hurdle to overcome. THIS DEAL WILL PRINT!

Back to the fundamentals, the professionals at Falcon’s Beyond are not being asked to do anything they haven’t done before. A billion dollar valuation, diluted for performance incentive earn-outs, is a significant starting valuation, but the resultant combination of equity and/or debt, invested productively in brick & mortar projects, and the earnings power at the Creative division should support a good portion of that. Moreover, the value of Falcon’s 50% portion of just the first few projects with Meliá Hotels could approximate the initial $1B valuation.  Longer term, more Destination projects with Meliá and others, expanded Creative business with Qiddiya (described below) and others, and Brands could combine to double the projected mid-2025 $131M run rate of EBITDA by ’28-’29. It is a crucial consideration that Creative operations, with a $755M backlog to be addressed over 4-5 years, should shortly be cash flow positive, available for the development of brick & mortar assets. This feature, along with the banking relationships of Meliá, should allow for growth as planned, even if final proceeds are less than FZT currently holds. The possibility of $131M annualized EBITDA in just over 2 years, the potential to build billions of capitalized value attached to new brick and mortar assets, with Intellectual Property development a material “kicker”, makes the current $1B (or $620M) starting point appear reasonable. Should results lag expectations for the base case (and the earn-outs), the $620M lower valuation will provide substantially more reward for public shareholders who wait out the time for the fundamentals to develop.  Precise timing of events is always uncertain, and the degree of success cannot be assured, but the intellectual, physical and financial assets seem to be in place. While, per Yogi Berra, “Predictions are always difficult, especially about the future”, uniquely positioned Falcon’s Beyond provides an unusually attractive investment proposition

FALCON’S BEYOND IN MORE DETAIL

Falcon’s and its predecessor Creative companies have executed story-driven development projects related to over $100B worth of projects in 27 countries and currently have $755M of revenue visibility. They are uniquely equipped to respond to the secular shift to “experiential” consumer leisure pursuits.

A 50/50 Destination driven joint venture with Meliá Hotels, operator of 380 resort venues around the world, can provide value to Falcon’s common stock by way of $131M of base case annualized EBITDA in just over 2 years.

Last, but far from least, Falcon’s Intellectual Property and Brand Development is expected to be an equal third leg to Falcon’s long term value building process.  Falcon’s Creative Group designs the projects, Destination develops the hard assets, and Brands will deploy proprietary and partnered brands across entertainment and consumer product categories.

Falcon’s Creative Group

For twenty-three years Falcon’s Creative Group has executed master plans, design, and media production projects all over the world, winning over 30 industry awards, and creating the capacity to serve billions of guests. The decades of experience as a third-party design firm sets up Falcon’s to now develop physical entertainment attractions and Intellectual Property for their own account. Their historical success is supported by the fact that 58% of first-time clients have returned for additional services, the scope of which expanded by 60x.

Specific projects have included master plans for Lionsgate Zone in Dubai, U.A.E. and Atlantis Sanya in Hainan Island, China. Attractions and experiential destinations have included Hulk Epsilon Base 3D in Dubai, U.A.E. and Kennedy Space Center Heroes & Legends in FL, USA. Captivating media projects have included Become Jane: The Evolution of Jane Goodall, in Washington, DC, and Halo: OutPost Discovery which toured across the USA. Experiential Restaurant and Retail developments have included Finn & Jake’s Everything Burrito and Marvel Vault Store, both at the IMG Worlds of Adventure Theme Park in Dubai, Falcon’s award winning technology includes experiences such as Spheron, CircuMotion, Falcon’s Vision AR Headset, the Spectra Verse Game Bay gameplay ecosystem, Suspended Theater, SpectraVerse, ONIX Theatre, and AEONXP technology. In the course of developing the above projects and technology, multiple patents have been granted in more than a dozen countries. Below are links to short video presentations for just a few of the named projects and products.

ESPECIALLY ILLUSTRATIVE OF THEME PARK CAPABILITIES: SEE “IMG”, BELOW:

(point & click, point & click on link)

https://vimeo.com/227291407  “IMG” Worlds of Adventure, Dubai –

https://vimeo.com/372003261 – Halo: Outpost Discovery

https://vimeo.com/378417546 – Spectra Verse Game Bay ecosystem

https://vimeo.com/111864378 – Suspended Theatre

                Current projects:

As shown in the first chart below, Falcon’s Creative has contracted full concept master plans for five “third party” theme parks, estimated to amount to $655M of goods and services, in addition to about $100M relative to the JV with Meliá.  Applying the estimated gross margin of 30-35% to services and 17-18% to hardware, the total gross margin (at the midpoint) would be $158M. Based on the timeline shown on the chart just above, one fifth of that would be about $32M of annual gross margin generated for Falcon’s.

Not shown below, Falcon’s is also actively developing the pre-concept master plans for three unique theme parks, each of which can generate subsequent phases of design.

There is continuing support of Qiddiya, one of a series of giga-projects in Saudi Arabia, designed to consist of 367 square kilometers of family friendly theme parks, sports arenas (suitable for int’l competitions), academies for sports and the arts, concert and entertainment venues, motorsport racetracks and nature/environmental adventure activities. To date for Qiddiya, Falcon’s Creative has led the design of 26 distinct entertainment assets for a district that ranges from hotels to theme parks. This has also included the design of the region’s largest water theme park, spanning 252,000 square meters and combining 22 wet and dry attractions alongside competition level water sports facilities. Falcon’s is also now supporting the project in the role of creative guardian as construction advances.

Creative (as a segment of Falcon’s Beyond) should shortly be operating with a substantial positive cash flow. Subject to the timing of individual projects, the Creative segment of daily activities seems capable of generating something like $25-35MM of annual EBITDA. That should contribute substantially to the asset building brick and mortar activities with Meliá and otherwise, as well as support the asset light activities of Falcon’s Brands.

Falcon’s Beyond Destinations is currently comprised of the hotel and Katmandu theme park in Mallorca, the hotel in Tenerife, and a shopping center and Katmandu theme park in Punta Cana with three 50-50 projects under way. The hotels, contributed by Meliá and the Katmandu parks primarily designed and financed by Falcon’s, will be part of the 50-50 joint venture. Falcon’s Central the adjacent retail, dining and entertainment venue will be built, operated and 100% owned by Falcon’s.

The model for the Falcon’s Destination/Meliá Joint Venture was the Sol Katmandu Park and Resort in Mallorca, Spain, the park having been established in 2007, whose performance improved substantially after merging with the adjacent Meliá hotel in 2012, complemented by the Katmandu compact theme park.  The design of this combined “entertainment with rooms” destination makes it convenient for guests to visit throughout the day and evening. Falcon’s proprietary stories, characters and environments are used to transport guests to Katmandu via immersive theming from entry through queues into each attraction.  The theme park, prior to COVID, averaged over 240,000 visitors per year, generated in only seven months per year. The hotel’s average occupancy was 77%, 6 points better than non-Katmandu hotels in Mallorca, with an average room rate of $154, 11% higher than non-Katmandu rooms.

The improvement in Mallorca, and the working relationship between Falcon’s Chairman, Scott Demerau, with Meliá encouraged the formation of the JV. Meliá has more than 380 resort destinations across over 40 countries. Scott Demerau’s team has the theme park operating experience, and Cecil Magpuri leads the Creative production of a leading-edge entertainment experience. Meliá, by contributing an existing hotel to the JV, is betting that their 50% of the theme park (which Falcon’s is building) plus their 50% of the improved hotel cash flow, with higher room rates and occupancy, plus more business at other properties they may own in the area, will be more than their current cash flow from the hotel.  Falcon’s is getting access to premium resort real estate owned by Meliá that would be largely untouchable at today’s values. Both Meliá and Falcon’s will benefit from Meliá’s long term banking relationships, in addition to Falcon’s new access to US capital markets.

As the charts below from the Investor Presentation show: Within the joint venture are the Mallorca Sol Hotel and Katmandu theme park, plus the hotels and theme parks in Punta Cana (Dominican Republic, Tenerife (Canary Islands) and Playa del Carmen (Mexico). It should be noted that all are year-round tourist locations, 3.5M annually in Punta Cana, 8.4M in Tenerife and 12.5M in Playa del Carmen (excluding cruise ship visitors).
By mid-2025 the joint venture expects to own and operate four destination resorts with over 1,900 hotel rooms, four theme parks, and three 100% owned retail districts. As shown below, the capitalized value of this brick-and-mortar portfolio could approximate the initial valuation of the deal, possibly more. Primary monetization of these developments will consist of hotel bookings, entertainment ticket sales, retail & food & beverage sales, and management fees.

   Falcon’s Central

Falcon’s Central is the “signature” venue at the center of the resort destination, merging retail, dining and entertainment. Guests are exposed to a multitude of entertainment experiences, amenities, IP content and merchandise. Dining experiences are offered both from local restaurants as well as newly developed concepts. The shopping district offers both local and global retailers showcasing varied IP-infused merchandise. Attractions featured at Falcon’s Central will be VQUARIUM, a virtual adventure, STORY HUB, an immersive location-based entertainment experience, CURIOSITY PLAYGROUND, an experiential edutainment venue, and GAMEHUB, an immersive video game experience.

Falcon’s Brands – Last but Far from Least – the Asset Light “Kicker”

Falcon’s Brands will deploy and monetize owned and partnered brands. The unique brand expander strategy compresses the normal timeline for brand monetization, will do so across multiple venues, and include licensing agreements across outside channels.

 

 TRANSACTION OVERVIEW

The following chart summarizes the transaction. We have written before, and above, about the improvements in comparison to a typical SPAC structure. Most notable is (1) The starting valuation, without the earn-outs is a modest 4.7x projected base case 2025 EBITDA of $131M. If the earn-outs come into play, the starting valuation will be a still modest 7.7x the base case (2) The current operating cash flow should presumably be positive shortly, since CREATIVE is working off a $755M backlog (3) Principals within Falcon’s Beyond are remaining and will own 68% of the equity, and an affiliate is investing $60M  (4) Sponsors have contributed 20% of their shares to a bonus pool for SPAC shareholders who do not redeem and private placement investors (5) SPAC investors remaining will receive an 8% preferred stock for half their shares. (6) Private placement investors have agreed to vesting in equal installments over four years.

PEER OPERATIONAL BENCHMARKING

The charts below, from the Investor Presentation, show how reasonably valued Falcon’s is, based on the growth rate, EBITDA margins, and 2025 projected revenues and EBITDA. These numbers, to us, are mostly illustrative of the substantial re-rating possibilities for Falcon’s stock if and when they have produced the results as projected. Since Falcon’s Beyond is expected to be growing much faster than the peer group, the valuation accorded should be proportionately higher.

CONCLUSION: As provided above

From what we now know, having studied and physically visited this situation over the last eight months, it seems to us that success is more a question of how much and when, rather than if. Another important consideration is that the latest SPAC structural change is that there is no redemption hurdle to overcome. THIS DEAL WILL PRINT!

Back to the fundamentals, the professionals at Falcon’s Beyond are not being asked to do anything they haven’t done before. A billion dollar valuation, diluted for performance incentive earnouts, is a significant starting valuation, but the resultant combination of equity and/or debt, invested productively in brick & mortar projects, and the earnings power at the Creative division should support a good portion of that. Moreover, the value of Falcon’s 50% portion of just the first few projects with Meliá Hotels could approximate the initial $1B valuation.  Longer term, more Destinations projects with Meliá and others, expanded Creative business with Qiddiya (described below) and others, and Brands could combine to double the projected mid-2025 $131M run rate of EBITDA by ’28-’29. It is a crucial consideration that Creative operations, with a $755M backlog to be addressed over 4-5 years, should shortly be cash flow positive, available for the development of brick & mortar assets. This feature, along with the banking relationships of Meliá, should allow for growth as planned, even if final proceeds are less than FZT currently holds. The possibility of $131M annualized EBITDA in just over 2 years, the potential to build billions of capitalized value attached to new brick and mortar assets, with Intellectual Property development a material “kicker”, makes the current $1B starting point appear reasonable. Should results lag expectations for the base case (and the earnouts), the starting valuation will be only $620M, and public shareholders will receive more reward for the extra time spent to reach corporate objectives.  Precise timing of events is always uncertain, and the degree of success cannot be assured, but the intellectual, physical and financial assets seem to be in place. While, per Yogi Berra, “Predictions are always difficult, especially about the future.”, uniquely positioned Falcon’s Beyond provides an unusually attractive investment proposition

Roger Lipton

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOODLES (NDLS)

Corporate Research, Restaurant/Food Service, Uncategorized,
PENDING THE RELEVANT COMPANY’S REGISTRATION WITH US, THIS PARTICULAR CONTENT IS LIMITED TO SUBSCRIBERS. For $100/year, SUBSCRIBE HERE. Other content is available by way of Home Page.

INCLUDED IN YOUR ANNUAL SUBSCRIPTION:

  • Access to Corporate Descriptions of all publicly held restaurant companies and selected non-restaurant franchisors.
  • Broad economic insight. As described in “Restaurants/Retail – Why Bother?” the restaurant and retail industries provide a leading indicator of far broader economic trends. You no longer have to be the last to know.
  • Two to three analytical pieces per week (“Roger’s Rap”) personally written by Roger Lipton describing corporate developments within his industry specialization, including their relevance to the broader economy.
  • Periodic “macro” discussions personally written by Roger Lipton, analyzing fiscal and monetary matters that will likely affect your investments and your business.
  • A free copy of the legendary best selling book, How you can Profit from the coming devaluation, as shown at right, written in 1970 by Harry Browne, which predicted the 2000% rise in the price of gold. This profound piece is more relevant today than ever, so Roger re-published it in 2012. This book will help you preserve the fortune you are in the process of accumulating.

FRANCHISE GROUP, INC. (FRG)

Corporate Research, Non-Restaurant/Franchising,
PENDING THE RELEVANT COMPANY’S REGISTRATION WITH US, THIS PARTICULAR CONTENT IS LIMITED TO SUBSCRIBERS. For $100/year, SUBSCRIBE HERE. Other content is available by way of Home Page.

INCLUDED IN YOUR ANNUAL SUBSCRIPTION:

  • Access to Corporate Descriptions of all publicly held restaurant companies and selected non-restaurant franchisors.
  • Broad economic insight. As described in “Restaurants/Retail – Why Bother?” the restaurant and retail industries provide a leading indicator of far broader economic trends. You no longer have to be the last to know.
  • Two to three analytical pieces per week (“Roger’s Rap”) personally written by Roger Lipton describing corporate developments within his industry specialization, including their relevance to the broader economy.
  • Periodic “macro” discussions personally written by Roger Lipton, analyzing fiscal and monetary matters that will likely affect your investments and your business.
  • A free copy of the legendary best selling book, How you can Profit from the coming devaluation, as shown at right, written in 1970 by Harry Browne, which predicted the 2000% rise in the price of gold. This profound piece is more relevant today than ever, so Roger re-published it in 2012. This book will help you preserve the fortune you are in the process of accumulating.

CARROLS RESTAURANT (TAST)

Corporate Research, Restaurant/Food Service,
PENDING THE RELEVANT COMPANY’S REGISTRATION WITH US, THIS PARTICULAR CONTENT IS LIMITED TO SUBSCRIBERS. For $100/year, SUBSCRIBE HERE. Other content is available by way of Home Page.

INCLUDED IN YOUR ANNUAL SUBSCRIPTION:

  • Access to Corporate Descriptions of all publicly held restaurant companies and selected non-restaurant franchisors.
  • Broad economic insight. As described in “Restaurants/Retail – Why Bother?” the restaurant and retail industries provide a leading indicator of far broader economic trends. You no longer have to be the last to know.
  • Two to three analytical pieces per week (“Roger’s Rap”) personally written by Roger Lipton describing corporate developments within his industry specialization, including their relevance to the broader economy.
  • Periodic “macro” discussions personally written by Roger Lipton, analyzing fiscal and monetary matters that will likely affect your investments and your business.
  • A free copy of the legendary best selling book, How you can Profit from the coming devaluation, as shown at right, written in 1970 by Harry Browne, which predicted the 2000% rise in the price of gold. This profound piece is more relevant today than ever, so Roger re-published it in 2012. This book will help you preserve the fortune you are in the process of accumulating.

RED ROBIN GOURMET (RRGB)

Corporate Research, Restaurant/Food Service, Uncategorized,
PENDING THE RELEVANT COMPANY’S REGISTRATION WITH US, THIS PARTICULAR CONTENT IS LIMITED TO SUBSCRIBERS. For $100/year, SUBSCRIBE HERE. Other content is available by way of Home Page.

INCLUDED IN YOUR ANNUAL SUBSCRIPTION:

  • Access to Corporate Descriptions of all publicly held restaurant companies and selected non-restaurant franchisors.
  • Broad economic insight. As described in “Restaurants/Retail – Why Bother?” the restaurant and retail industries provide a leading indicator of far broader economic trends. You no longer have to be the last to know.
  • Two to three analytical pieces per week (“Roger’s Rap”) personally written by Roger Lipton describing corporate developments within his industry specialization, including their relevance to the broader economy.
  • Periodic “macro” discussions personally written by Roger Lipton, analyzing fiscal and monetary matters that will likely affect your investments and your business.
  • A free copy of the legendary best selling book, How you can Profit from the coming devaluation, as shown at right, written in 1970 by Harry Browne, which predicted the 2000% rise in the price of gold. This profound piece is more relevant today than ever, so Roger re-published it in 2012. This book will help you preserve the fortune you are in the process of accumulating.

FIRST WATCH (FWRG)

Corporate Research, Restaurant/Food Service,
PENDING THE RELEVANT COMPANY’S REGISTRATION WITH US, THIS PARTICULAR CONTENT IS LIMITED TO SUBSCRIBERS. For $100/year, SUBSCRIBE HERE. Other content is available by way of Home Page.

INCLUDED IN YOUR ANNUAL SUBSCRIPTION:

  • Access to Corporate Descriptions of all publicly held restaurant companies and selected non-restaurant franchisors.
  • Broad economic insight. As described in “Restaurants/Retail – Why Bother?” the restaurant and retail industries provide a leading indicator of far broader economic trends. You no longer have to be the last to know.
  • Two to three analytical pieces per week (“Roger’s Rap”) personally written by Roger Lipton describing corporate developments within his industry specialization, including their relevance to the broader economy.
  • Periodic “macro” discussions personally written by Roger Lipton, analyzing fiscal and monetary matters that will likely affect your investments and your business.
  • A free copy of the legendary best selling book, How you can Profit from the coming devaluation, as shown at right, written in 1970 by Harry Browne, which predicted the 2000% rise in the price of gold. This profound piece is more relevant today than ever, so Roger re-published it in 2012. This book will help you preserve the fortune you are in the process of accumulating.

FAT Brands’ FOUNDER AND CEO, ANDY WIEDERHORN, TO STEP ASIDE

articles, Uncategorized,

FAT Brands, Inc. announced last week that founder and CEO, Andy Wiederhorn will step aside as of May 5th, transitioning to a new role as “outside consultant and strategic advisor”.

Having followed, and written of, FAT Brands’ emergence as a franchisor of seventeen restaurant brands, the largest, and likely most promising, being Twin Peaks, we are surprised but not shocked.

Wiederhorn, over several years including the heart of Covid related disruptions, creatively assembled a collection of growing franchising brands, including Twin Peaks, Round Table Pizza, Fazoli’s, Johnny Rockets and Fatburger, the brand he started with. This assemblage was accomplished by borrowing over $900M long term, securitized by the royalty streams. The expectation, and the reported results in calendar ’22 ($88.8M of Adjusted Corporate EBITDA), support the Company’s previous estimates that these brands would generate upwards of $90M of Adjusted Corporate EBITDA, once Covid ran its course.

It should be noted that the $88.8M of Adjusted EBITDA in ’22 was after adding back almost $19M of legal expenses, incurred dealing with a variety of legal actions. While management has indicated that some portion of the legal expense reported could be covered by insurance, the Company has accrued them to date. As discussed by Wiederhorn, on the most recent (February 22nd) conference call:

“SEC investigations are never good for shareholders just because of the cost. And we are — we made significant progress in terms of responding to the inquiries that we received related to the government investigation. I don’t think that there’s much more to respond to. I think that, hopefully, we’ll be able to see some sort of resolution as we finish the year. These things go slow. They can take years, as you know. But hopefully, we’ll see the legal expenses shrink here significantly. We do have opportunities for insurance defense coverage and recovery for some of these things but none of that is reflected in our financials. We haven’t seen insurance companies write checks yet, although we firmly believe that we’re covered under our policies. And we are pursuing recovery against those carriers.

“So you know how that goes sometimes where you have to actually file an action or commence arbitration and mediation to get coverage. We have done all those things. And we think that we will move it along nicely because there is also — it is not just the government investigation. We also have 2 derivative cases outstanding. Remember, in Q3 of last year, we settled 1 shareholder class action case which was good to get behind us to save further legal fees. But we’ve had plenty of discovery and things like that in the 2 derivative cases. We hope that those cases will be resolved during this calendar year and to get all this legal expense to go away once and for all.”

The implication we derive from this announcement is that Wiederhorn and his Board of Directors have concluded that his reduced role might facilitate an earlier resolution of the legal matters than would otherwise be the case.

While it remains to be seen what management adjustments will be made, calendar ’23 has already been described as a “consolidation year”, with the major brands performing well and the royalty stream expected to grow nicely. As we have previously described in our update as of February 27th, the cash position seems adequate to service the debt while the major brands expand and the royalty stream grows.

In terms of further risk to FAT stock at this point, we would be concerned if (1) lenders were somehow disillusioned and putting an unanticipated pressure on the Company or (2) there were further legal issues against the Company that would cause expanded, rather than reduced, legal exposure. Regarding (1) there seems to be no indication of that and the Company seems able to continue meeting their obligations to lenders. Regarding (2) from Wiederhorn’s commentary, as provided above, on February 27th, there has been no indication to that effect.

CONCLUSION:

Based on the information available, we do not believe that Wiederhorn stepping aside, should be construed as an important negative at this point and this action appears to have a productive logic behind it. Since he and his affiliates continue to be major shareholders of FAT Brands, in his absence as day-to-day CEO,  his strategic guidance will likely continue to be available, as stated.

Without question, FAT Brands common stock, (FAT), worth about $120M represents an equity “stub” or “option”, compared to the debt of close to one billion dollars. The Enterprise Value, at about 12x the current rounded $100M run rate of Adjusted EBITDA is less than some pure franchising peers with multiples in the high teens or even higher. This can be considered justifiable, in the context of the shorter operating history of the “new” FAT Brands, as well as the legal “hair” on the situation. It is also obvious that leverage works both ways. On the positive side, the business seems to be going well and the pipeline of stores to be developed seems capable of creating an additional $50-60M of Adjusted EBITDA over the next five years. If FAT is generating something like $150M of Adjusted EBITDA, the Enterprise Value at that point could be 15-20x, or $2.2B to $3.0B. If there are still 16M shares outstanding, and the debt were the same, the common stock would be worth $1.2B to $2.0B or $75 to $125/share. From a more conservative standpoint, if free cash flow of $50M were to represent a hefty 10% free cash flow yield, the stock would sell at $30/share, with a 5% free cash flow yield at $60/share. Investors can make their own assumptions in terms of the possibility of the Company accomplishing its projections, and/or the likelihood of more stock or debt being issued. The bottom line remains that the upside possibilities are an order of magnitude larger than the $7.50/share at risk.

Roger Lipton

THE WEEK THAT WAS, ENDING MARCH 10th – STILL QUITE A FEW EARNINGS REPORTS – ONLY TWO RATINGS CHANGES – with relevant transcripts

articles

 

Regarding companies previously reporting: All but two ratings “maintained”. Two changes were Wendy’s, downgraded from Buy to Hold, and Carrol’s, upgraded from Hold to Buy.

Dine Brands maintained at Overweight.

Xponential Fitness maintained at Buy.

Papa John’s maintained at Hold

Yum Brands, McDonald’s, Fiesta Restaurant Group all maintained at Buy

REPORTED IN PAST WEEK   

For Companies Reporting During Week:  First Watch, Noodles, The One Group Hospitality, The Joint, European Wax Center, El Pollo Loco – No changes, nor updates on The Joint and El Pollo Loco

Re: First Watch: No change. One Neutral, Two Positive

Re: The One Group: No change. One Neutral, One Positive

Re Noodles: No change. Both firms like it

Re European  Wax Center – No change. One firm likes it

No rankings shown for The Joint and El Pollo Loco

Conference call transcripts are below for all companies reporting in prior weeks with ratings changes  (Wendy’s and Carrol’s), or initiations (None) and companies reporting in THE WEEK THAT WAS (First Watch, Noodles, The One Group Hospitality, The Joint, European Wax Center, El Pollo Loco).

Wendy’s

https://seekingalpha.com/article/4583432-wendys-company-wen-q4-2022-earnings-call-transcript

First Watch

https://seekingalpha.com/article/4585292-first-watch-restaurant-group-inc-fwrg-q4-2022-earnings-call-transcript

https://seekingalpha.com/article/4585224-first-watch-restaurant-group-inc-2022-q4-results-earnings-call-presentation

Noodles

https://seekingalpha.com/article/4585800-noodles-and-company-ndls-q4-2022-earnings-call-transcript

The One Group Hospitality

https://seekingalpha.com/article/4586334-one-group-hospitality-inc-stks-q4-2022-earnings-call-transcript

The Joint

https://seekingalpha.com/article/4586275-joint-corp-jynt-q4-2022-earnings-call-transcript

https://seekingalpha.com/article/4586237-joint-corp-2022-q4-results-earnings-call-presentation

European Wax Center

https://seekingalpha.com/article/4586185-european-wax-center-inc-ewcz-q4-2022-earnings-call-transcript

El Pollo Loco

https://seekingalpha.com/article/4586318-el-pollo-loco-holdings-inc-loco-q4-2022-earnings-call-transcript

THE WEEK TO COME – things are quieting down

FIESTA RESTAURANT GROUP (FRGI)

Corporate Research, Restaurant/Food Service,
PENDING THE RELEVANT COMPANY’S REGISTRATION WITH US, THIS PARTICULAR CONTENT IS LIMITED TO SUBSCRIBERS. For $100/year, SUBSCRIBE HERE. Other content is available by way of Home Page.

INCLUDED IN YOUR ANNUAL SUBSCRIPTION:

  • Access to Corporate Descriptions of all publicly held restaurant companies and selected non-restaurant franchisors.
  • Broad economic insight. As described in “Restaurants/Retail – Why Bother?” the restaurant and retail industries provide a leading indicator of far broader economic trends. You no longer have to be the last to know.
  • Two to three analytical pieces per week (“Roger’s Rap”) personally written by Roger Lipton describing corporate developments within his industry specialization, including their relevance to the broader economy.
  • Periodic “macro” discussions personally written by Roger Lipton, analyzing fiscal and monetary matters that will likely affect your investments and your business.
  • A free copy of the legendary best selling book, How you can Profit from the coming devaluation, as shown at right, written in 1970 by Harry Browne, which predicted the 2000% rise in the price of gold. This profound piece is more relevant today than ever, so Roger re-published it in 2012. This book will help you preserve the fortune you are in the process of accumulating.