Tag Archives: Fertitta

FST/FERTITTA – WITH TILMAN IT’S NEVER BORING!

FST/FERTITTA – WITH TILMAN IT’S NEVER BORING!

The preliminary proxy for the merger of Fertitta Entertainment (FEI) into (SPAC) FAST Acquisition Corp. (FST) was filed on August 2nd. It usually takes the SEC about 90 days to approve this type of document and we would bet on the “over” in this case. The document is 250 pages long plus exhibits and Tilman Fertitta doesn’t stop doing deals, even when SEC filings are under review.

We have written before about FST/FEI, when the original business combination was suggested and when Fertitta sweetened the deal more recently. These reports can be accessed by way of the SEARCH function on our Home Page. (Fertitta, FST, etc.), the most recent article provided with the link below.

This morning it was announced that DraftKing (DKNG) is going to buy/merge with Golden Nugget Online Gaming (GNOG) (46% of which is owned by FEI).  DKNG has been one of the very successful SPACs offered over the last several years, and Fertitta sponsored GNOG has done well also. DKNG is much bigger in terms of its equity capitalization, $21.1B vs. $1.4B for GNOG and sales as well, generating $297M of revenues in its most recent quarter, almost 13x the $23.1M of GNOG. DKNG has not been profitable yet, and  is estimated to remain unprofitable through 2022. GNOG has been profitable the last two quarters but is currently expected to be unprofitable through 2022.

Both parties are predictably excited about the combination. There are expected to be $300M of synergies from the combination, and “the space” is exciting to investors. We will likely be writing more about this situation because the FST/FEI combination, when and if completed, will create a hospitality company with revenues approaching $10B and $800B of annual EBITDA.

Our interest at the moment is how this DKNG/GNOG transaction affects the still pending business combination of FST and FEI. While FEI has agreed not to sell their $700B worth of DKNG for at least a year, today’s premium added to GNOG shares and the enhanced liquidity for the future is clearly a positive. Recall that the recently sweetened deal, as described below, increased the EBITDA current annualized run rate to $800M, up from the previously expected $648M out in 2022. This additive adjustment was no doubt provided by Fertitta to create more investor comfort with the $3B of debt.

In brief, the prospect of liquidity in DKNG shares, to be worth $700M more or less, should make FST investors even more comfortable and increase the probability of the business combination being approved. We’ve provided a link to “the room where it happened” just below.

https://www.liptonfinancialservices.com/2021/07/in-the-room-where-it-happened-why-did-tilman-fertitta-sweeten-the-deal/

Roger Lipton

BOOK REVIEW! TILMAN FERTITTA’S “SHUT UP AND LISTEN” – COULD NOT BE MORE TIMELY

BOOK REVIEW – SHUT UP AND LISTEN

We are not in the business of reviewing books, but we are always interested in best practices of very successful restaurant/hospitality operators. That is why we periodically report on commentary by CEOs such as Gene Lee of Darden and Danny Meyer of USHG. We therefore spent an interesting five hours on a flight to LA reading Fertitta’s “Shut Up and Listen”.

You don’t build a multi-billion dollar hospitality empire over 40 years without doing a lot of things right and we feel like we have had a ringside seat since Fertitta brought Landrys’s public with twenty units in the eighties. His “easy read”, of course flattering, provides an informative description of how he navigated the macro economic cycles, as well as his management principles.  This is especially interesting since his hospitality empire is about to become publicly held once again by way of a merger with SPAC, Fast Acquisition Corp. (FST).  In preview, we admire his style, and have to be impressed with his accomplishments but our relationship with him and FST is arms length. We haven’t spoken to Tilman Fertitta in decades, and we get no royalties on book sales.

No two management styles are exactly the same, nor should they be. It comes through loud and clear that Fertitta knows what he wants and when he wants it, and we have heard numerous comments through the years that Fertitta is demanding. However, nobody  has ever described to us that his requirements have been unreasonable, and that is consistent with his self evaluation. We get the impression that he pushes nobody harder than he pushes himself. We believe it is also telling that there aren’t a lot of ex-Fertitta executives out there. Seems like he must be more than careful about whom he brings aboard and most likely rewards them pretty well thereafter.

We won’t describe here all the details, but the chapters include: Hospitality Matters, Take the Word “No” Out of Your Vocabulary, Cater to the Masses, Working Capital is Everything, The Pitfalls of Property Leases, KNOW YOUR NUMBERS, Leverage Your Strengths, Partner with Complementary Strengths, Don’t Ever Lose the Hunger, LISTEN first, Change Change Change” and the Conclusion: Don’t Choose to Quit, Keep Punching.

Aside from the above, we found especially interesting Fertitta’s macro moves, leveraging his business in the bad times, staying liquid and buying distress properties that would almost certainly recover over time. This was brilliantly employed in the crash of 08-09, and Fertitta became a multi billionaire, allowing, among other things, him to personally buy the NBA’s Houston Rockets for $1.2 billion.

The one thing that Fertitta could not foresee, however, was a worldwide pandemic that mostly shut down his basketball arena, his casinos and his 450 dinner houses. This is not good when you are carrying $4.5 billion of debt, and that is when Fertitta’s Conclusion, written pre-pandemic in 2019, “Don’t Choose to Quit, Keep Punching” kicked in.

With the pending merger of the Fertitta hospitality empire into FST, just as the new COVID variant becomes of concern, check out the book, and stay tuned.

Roger Lipton

ROGER’S 7/15/21 MONTHLY COLUMN IN RESTAURANT FINANCE MONITOR, THEIR “MUST ATTEND” LAS VEGAS CONFERENCE IS COMING UP IN NOVEMBER

FOLLOW THE MONEY WITH ROGER LIPTON – RESTAURANT FINANCE MONTIOR -7/15/21

MERGER-ACQUISITION ACTIVITY HEATS UP – WHAT’S GOING ON?

There has been a flurry of M&A activity: Panera selling Au Bon Pain; FAT Brands buying GFG Group with five brands; Famous Dave’s buying Village Inn and Baker’s Square; Lee’s Famous Recipe sold again; A Jack in the Box franchisee buying Taco Cabana; J. Alexander’s going private; the $500M IPO of Krispy Kreme and Fertitta’s multi-billion dollar SPAC transaction. The reasons include: (1) Very low Interest rates (2) P/E firms and SPACs are flush with cash and the restaurant space is always seductive. (3) The industry is recovering almost daily, so buyers sense opportunity, especially since off-premise sales provide new growth possibilities. (4) Post-pandemic it is natural for some single brand owners to have “had enough” and multi-branded operators have had ample time to decide which portions of the tree are worth pruning. With future operating margins still uncertain, there is therefore an ongoing pool of willing sellers. (5) Public valuations have recovered, providing a reference point for private valuations, all of which can be tolerated with the still low interest rates (6) The talk, by the Biden administration, of much higher capital gains taxes provides strong current motivation. Our conclusion: virtually all of the above ingredients will remain for the foreseeable future. Additionally, campaign season for the mid-term national election is already upon us. The Treasury and the Federal Reserve, openly working in tandem (violating the supposed independence of the Fed), will therefore keep interest rates low and money available. If you are a potential seller, get your power point presentation ready and, as Bernard Baruch advised, leave a little on the table for the next guy.  If you are a buyer, be careful out there. It’s not as easy as it sometimes looks, and leverage works both ways.

IN “THE ROOM WHERE IT HAPPENED” – WHY DID TILMAN FERTITTA SWEETEN THE DEAL? Outside the room, 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, normally 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), especially with the SPAC index trading down about 25% from its high earlier this year.

With even 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 his empire was strung out with over $4B in debt and apparently around $400M of pandemic depressed trailing EBIDA. Three months into 2021, there had been an already material recovery, so the original FST/Fertitta merged guidance was $648M of EBITDA in 2022. Now, 3 months later 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 ran rate. The new Enterprise Value/EBITDA is not materially different from the original. Importantly, however, the debt is not being increased. The merged debt will have been reduced from $4.5B to “only” $3B, from the $200M IPO raise and privately raised equity (the PIPE) of $1.2B.In The Room Where It Happened: We suspect that the institutional shareholders of FST were not adequately comfortable with $3B of debt relative to the original $648M of projected ’22 EBITDA. This transaction, originally and as adjusted, is a great result for Fertitta, who only a year ago stooped to raise $250M at 15%. With the hospitality industry now improving daily, he could afford to sweeten the deal. 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. 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.

SANITY BEGINS ITS RETURN TO THE EQUITY MARKETPLACE: We wrote last month about the high contemplated IPO price for Krispy Kreme (DNUT). The deal was completed at $17/share, down from the original price range of $21 to $24 and the stock is currently trading around $18. Of the six restaurant related SPACs that are trading, only one is materially above the issue price and Tilman Fertitta sweetened the deal materially, as described above. Bitcoin, which we have also written extensively about, is down 50% from its high of just ninety days ago and 10,000 other cryptocurrencies are suffering to varying degrees. All good things come to an end.

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

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 EBIDA. 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 ran 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

TILMAN FERTITTA COULD USE SOME HELP – HOW ABOUT HIS SPACs??

  1. 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.

Landry’s:

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.

CONCLUSION:

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.

Roger Lipton