Tag Archives: FST

ROGER’S 8/15/21 MONTHLY COLUMN IN RESTAURANT FINANCE MONITOR – Fifty years of inflation, update on Tilman Fertitta, Chuy’s 2nd qtr.results

Fifty Years Flies By: – August 15th, is the fiftieth anniversary of Richard Nixon “closing the gold window”, eliminating the convertibility of the US Dollar into gold at $35/oz. This kicked off the stagflation of the nineteen seventies, with inflation peaking at about 12% annually and the Fed Funds rate at 18%. The lack of a spending discipline by politicians has run the annual deficit from $100B in 1980 to $3-4T today and the accumulated deficit from $1T to $28T (without considering unfunded entitlements). The economy is six times larger but the deficits are still 5-6 times bigger in constant dollars. If you don’t consider that this lack of monetary discipline is important, consider that, in the last fifty years, the cost of a first-class stamp has gone from $.08 to$.55, a loaf of bread from $0.25 to $2.50, a gallon of regular gas from $0.36 to $3.05, an average car from $2,700 to $40,206, annual healthcare spending from $353 per person to over $10,000, and Harvard tuition from $2,600 to $54,000. It is equally interesting that the Harvard tuition in 1971 was 13 weeks’ worth of the median household’s annual income of $10,285.  The 2020 tuition is 36 weeks of the median household income of $78,500, demonstrating how wages have not kept up with the Dollar’s loss of purchasing power.

Gold bullion has gone from $35/oz. in 1971 to over $1800/oz. today, up 51x in value. You would have increased your purchasing power to whatever extent you had capital invested in gold bullion, even more so in the gold miners (which my readership knows I have favored for some time).

The good news for restaurant operators is that people have to eat and menu board pricing can change, carefully, as often as necessary. One piece of advice to growing restaurant chains is to make sure your rent escalation clause allows for no more than the rise in the government’s Consumer Price Index, CPI, (hopefully somewhat less). The CPI is consistently understating the real inflation (and the rise in menu prices) so your operating margin should “leverage” your sales increase by way of lower occupancy expenses, if nothing else.

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

We wrote here last month about “the room where it happened”, why and how Tilman Fertitta sweetened the deal for investors in his hospitality empire, soon to merge with FAST Acquisition Corp (FST).

A few days ago, 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, with higher sales as well, $297M 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, guiding to $300M of synergies. 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, the premium added to GNOG shares and the enhanced liquidity is clearly a positive. Recall that the recently sweetened deal, as we described here last month, increased the current annualized EBITDA run rate to $800M, up from the previously expected $648M for 2022. This additive adjustment was no doubt provided by Fertitta to create more investor comfort with the $3B of debt and the DKNG/GNOG merger should further alleviate concerns. Tilman Fertitta rarely sits still.

Chuy’s Holdings – 2nd Quarter Report is Instructive –

Chuy’s Holdings, Inc. (CHUY) recently reported results for the quarter ending 6/30/21, at which point all stores were open again. As background, CHUY continues to be a well-run, debt free Company, though their results have flattened since 2016. Absent a tax credit in 2017, EPS has been around $1.00 per share as comps weakened and margins sagged, offsetting new store openings. At this point, setting aside YTY comparisons, we were struck by the dramatic improvement in Q2’21 vs. Q2’19 and scrutiny illustrated the ongoing uncertainty within the restaurant industry. The dramatic two-year comparisons actually started in Q3’20 with EPS coming in at $0.31/share vs. $0.21. That improving trend has continued and $0.62 in Q2’21 compared to $0.37 in Q2’19. Sales, BTW, were $108M, down from $113M so what the heck is going on? Answer: Cost of goods was down 200 bp. Labor was down 650 bp. Income before taxes was therefore up 720 bp, with after tax net income almost doubling. It’s all about the slimmed down menu and less labor necessary to serve off-premise consumption. BTW, prices are 4.8% higher YTY, which helps also. The instructive part is that management, on the conference call, expressed uncertainty as to how everything sorts out over time. They guided to a less dramatic 300-350 bp of improvement over 2019, but admitted uncertainty and were not providing formal guidance. Off Premise sales in Q2 were 27%, down from 61% in 2020, and up from 13% in 2019. The Street consensus is for $1.75/sh In ’21, up from $0.84 in ’20, then a decline in ’22 to $1.56, still well above that five year $1.00 plateau. Aside from uncertain sales, an unpredictable mix between dine-in and off-premise, a labor crisis, and possibly volatile commodity prices, it’s all very clear.

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

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

RESTAURANT RELATED SPACS – EIGHT SITUATIONS – PROGRESS REPORT

RESTAURANT RELATED SPACS – EIGHT SITUATIONS – PROGRESS REPORT

CONCLUSION

We have written periodically about this previously very hot segment, and our readers can use the SEARCH function on our Home Page to review our commentary. Suffice to say that great care should be employed while investing within this segment, not only when acquisitions have already been consummated but while the transaction is pending and even at the original IPO. At this point, the bloom is definitely coming off the SPAC rose.  The SPAC index, after rising from just over 500 in early November ’20 to almost 950 by mid-February ’21, has declined to 720 as this has written.

Fortunately, there has not been too much money lost (yet) for investors in the restaurant related SPAC space. There are eight SPAC transactions that have been in play over the last two years, only one of which (OPES/BurgerFi) has consummated a transaction. This means that shareholders who invested in the IPOs still have the opportunity to get their funds back if they don’t like the suggested transaction, and that could yet happen. Should that be the case, the Sponsors would lose their organizational investment, anywhere from a few hundred thousand to a few million dollars, but at least the public will not have been burned.

Of the seven SPACs that have not yet consummated a business combination, one (FST) has proposed an acquisition. Four sponsorship groups have raised their funds and are screening potential acquisitions, and two are trying to complete their IPOS. The following is a brief summary of each current situation, with an equally concise description of the Sponsors and management teams. This discussion is not designed to be exhaustive but rather to remind us who is involved in each situation. I say to the principals of the SPACs described below: please forgive me if I have not, in my attempt to be concise,  completely described your professional credentials. Each of you has accomplished far more than I have, too briefly, referenced below.

It is interesting that two of the six restaurant related SPACs that have been funded, and one of the two yet to be funded, have been spawned by entrepreneurs affiliated with &vest, a brand building group which, among other things, created Washington, DC based &Pizza. Doug Jacob, Steve Salis, Sandy Beall, Michael Lastoria, et.al., seem to have a good instinct for knowing how a great deal of money can be made.

😊 That said, I suspect that all of the Sponsors, as described below, will find that it takes a lot longer to cash out than they might have hoped. It’s one thing to ride the wave. It’s another to get to the beach, put  your feet up and enjoy a beer.

The One Consummated Transaction

BurgerFi (BFI) is the only publicly held restaurant company that has been spawned by a SPAC, OPES Acquisition Corp., when $115M was raised in March ’18 by a Sponsorship group out of Canada. After an acquisition search over two years, the Canadian group passed part of their sponsorship stake and the remaining process to a new Sponsorship group led by Florida based real estate entrepreneur, Ophir Sternberg. By that time, in the course of several time extensions, over half of the originally raised funds had been redeemed. More funds were raised, and the BurgerFi transaction was completed in December, 2020. We have described BFI on this website before, including operational details so far reported by the new Company. Our reports can be accessed with the SEARCH function on this website. BFI has traded above $16/share several times since the closing in December, but is now trading between $10-$11/share. Since there has been little news of note, other than management additions and first quarter, ’21 results, still inhibited in the waning days of Covid-19, we attribute the lackluster price action largely to reduced interest in SPACs in general.

The One Proposed Business Combination that is Pending

FAST Acquisition Corp (FST) raised $200M in August, 2020, with the sale of units consisting of one share and one-half a warrant . The Co-Chief Executive Officers were originally Sandy Beall (of Ruby Tuesday fame) and Doug Jacob (a brand builder and co-founder of &Pizza). Kevin Reddy, a restaurant veteran whose career has included executive positions at McDonald’s & Noodles, among many others, was Chairman.  The transaction proposed, with a preliminary proxy in process with the SEC, is the acquisition of Tilman Fertitta’s hospitality (restaurants, hotels & gaming) empire. This is a very large transaction ($6B of revenues) relative to the original ($200M) IPO, so $1.25B was raised privately (PIPE) to reduce Fertitta’s existing debt. The original Sponsor, Doug Jacob, along with his proposed executive team, have stepped aside in favor of Fertitta’s group. Fertitta will own 59% of the surviving Company, the PIPE shareholders will own 34.6%, the IPO shareholders 5.6% and Doug Jacob a little less than 1%. Jacob has obviously decided that he would rather own a very small sliver of a much bigger situation, handing over the corporate keys to an experienced entrepreneur, rather than having to manage the process himself. The good news is that the restaurant and hospitality industry is opening up as the pandemic runs its course, and the rebound in Las Vegas is especially apparent. Based on Fertitta’s empire returning to 2019 revenue levels, the case is made that profit margins will be improved as a result of efficiencies implemented during the Covid-19 pandemic. FST, post the merger, looks to have substantial upside if EBITDA and profits are generated as suggested. Since the deal was rumored in mid-January, FST has traded from about $10.25 to $12-13/share where it has fluctuated the last couple of months as presentations are made and papers are filed. Though the proxy material is no doubt complex, and the closing could yet take a few months, with FST trading at better than a 20% premium to the IPO price, it appears that shareholders will bless the deal. Considering Fertitta’s deal driven agenda, as demonstrated over thirty years in the public eye, FST will be an interesting situation to follow.

Four SPACs with Funds Raised

Tastemaker Acquisition Corp. (TMKRU) raised $276M on 1/8/21 with the sale of units consisting of one share and one-half a warrant. Tastemaker Sponsor LLC is owned by Pace, Phorzheimer and Golkin, further described as follows. The management team is led by Co-CEOs, Dave Pace and Andy Phorzheimer. Greg Golkin is President and Chris Bradley is CFO. Pace has been Board Chairman of Red Robin (RRGB), CEO of Jamba, Inc.(JMBA) as well as with Bloomin’ Brands (BLMN), Starbucks (SBUX), Yum Brands (YUM) and Pepsico  (PEP). Phorzheimer was co-founder of Barteca Holdings (operator of Bartaco Barcelona Wine Bar), which was sold to Del Frisco’s For $325M in June, 2018. He is currently an independent Board member at brands owned by L. Catterton, Brentwood Associates and Rosser Capital. Golkin has been Managing Partner at Kitchen Fund, an investor in growth restaurant brands, and an investor for many years in a variety of industries. Bradley has been a Managing Director at Mistral Equity Partners since 2008, previously an investment banker at Banc of America Securities. He is also CFO of Haymaker II (HYAC), a SPAC intending to acquire ARKO Holdings, Ltd., a convenience store operator, and previously served as CFO of Haymaker I, which combined with OneSpaWorld Holdings (OSW) in March, 2019. Hal Rosser, Founder and Managing Partner of Rosser Capital Partners, will serve as non-executive Chairman. There are highly qualified Directors, including Rick Federico, Starlette Johnson, and Andy Heyer. There has been no proposed business combination yet. The units trade at $10.00, the same as the issue price.

Bite Acquisition Corp (BITE) raised $200M on 2/12/21 with the sale of units consisting of one share of common stock and one-half a warrant. Bite’s Sponsor is Smart Dine, LLC, which is owned by various executives and directors of BITE, including Gomez, A.A. Gonzalez, Warschawski and J.M. Bernal, described further below. Rafael Felipe de Jesus Aguirre Gomez is Chairman, with over 35 years in food and beverage operations as Chairman of Mexican based Mesa Corporation. Alberto Ardura Gonzalez, CEO, has more than 35 years of experience in finance, with Merrill Lynch Mexico, Deutsche Bank in NYC as head of Latin America Capital Markets and Nomura Securities. CFO of BITE, Axel Warschawski has been in finance and private equity for over 15 years, as a VP for Mesa since 2013. Director nominees include Julia Stewart, Randall Hiatt, Joseph Essa and Juan M. Gonzalez Bernal, all with impressive credentials. No business combination has yet been proposed. BITEU currently trades at $9.88 per unit

USHG Acquisition Corp. (HUGS/U) raised $287M on 2/24/21 with the sale of units consisting of one share and one-third of a warrant.    HUGS’ Sponsor is USHG Investments, LLC,  an affiliate of Union Square Hospitality Group, LLC, which was founded and is still led by the legendary Danny Meyer. Within HUGS, certain of the directors, officers, and their affiliates own a portion of the Sponsor. The management team is led by Chairman, Danny Meyer. The CEO is Adam Sokoloff, who since 2019 has been the Managing Partner of merchant banking firm, Asgard Capital Partners. Prior to that, he spent several decades in investment banking activities, with firms including Bear Stearns, Drexel Burnham, Kidder Peabody and Leonard Green. Tiffany Daniel, CFO at HUGS, was a VP at Cole Haan, before that a VP at Tapestry, before that with other fashion brands as well as with private equity firm, Bruckmann, Rosser, Sherrill & CO. Directors include J. Kristopher Galashan, Lisa Skeete Tatum, Mark Leavitt, Walter Robb, Randy Garutti, Heidi Messer, and Robert K. Steele, all highly credentialed. No business combination has yet been proposed. HUGS/U currently trades at $10.09 per unit.

FAST Acquisition Corp. II (FZT/U) raised $230M on 3/15/21. Doug Jacob had so much fun taking FAST I public, he followed it up with another, in fact a couple of others. While Jacob is the founder of FAST II, Garrett Schreiber is the Sponsor and CFO of FAST II. We note that Mr. Schreiber, at the ripe old age of thirty, was CFO of FST (above), is also CFO of Velocity Acquisition Corp (referred to below), joined RBC Capital Markets as an investment banking analyst in 2014 (obviously at the age of about 23), so is obviously very talented.  Jacob and Schreiber are joined once again by Sandy Beall (as CEO), Eugene Remm (as Chief Brand Officer), Michael Lastoria (CEO of &Pizza) and Steve Kassin, all principals of &vest, which is referred to as a “hybrid investment fund sponsor/creative agency”. Separately, we note that this group has a third SPAC, selling $230M in February, 2021 in technology oriented Velocity Acquisition Corp. In addition, Kevin Reddy follows his involvement at FAST by being Chairman of the Board for FAST II. There are quite a few other individuals brought in by Jacob, all proven Brand builders in their previous affiliations. The acquisition search is aimed at hospitality in general (i.e. restaurants, hotels, entertainment, consumer brands) and associated technology, differentiated products and/or services with high revenue growth and at least $40 million of EBITDA. Again, the above description of the people and the strategy is just scratching the surface. We will all learn more over time. The IPO units (FZT/U) is trading at $9.98.

Two SPACS Not Yet Funded

Sizzle Acquisition Corp (SZZLU) – Filed on March 11, 2021 a registration statement to raise $143M, by way of the sale of units, consisting of one share of common stock and one-half a warrant. The Sponsor is VO Sponsor, LLC, owned by Steve Salis and Jamie Karson, described further below. Chairman and CEO is Steve Salis, with extensive experience in restaurants and hospitality in Washington, DC. Among other things, Salis was co-founder of &pizza in July 2011 and was CEO from 7/11 to 3/15. Jamie Karson is Non-Executive Vice Chairman and has worked closely with Salis in recent years. From ’01 to ’08 he was CEO and Chairman of the Board of Steve Madden, prior to that CEO and COO of Think Pink, which operated 5 Pinkberry restaurants in Connecticut. Grace Park, CFO, joined Salis Holdings in July 2020, having been Corporate Controller at Five Guys from 2016 to 2020. Prior to that she was with KPMG and Nestle.  Once SZZLU is funded, Daniel Lee will become Head of Business and Corporate Development. Mr. Lee has worked with Steve Salis, since 2018, before that in business planning and finance at a variety of firms. Also following the SZZLU funding, Karen Kelley, Warren Thompson, and David Perlin will become directors, all with high quality credentials. In addition: Carolyn Trabuco, Geovannie Concepcion, and Rick Camac will serve as strategic advisors. We have no knowledge of the currently anticipated funding date.

Do It Again Corp (DOITU) – Filed on March 2, 2021 a registration statement to raise $143M, by way of the sale of units, consisting of one share of common tock and one-third of a warrant. The Sponsor is Do It Again Sponsor LLC, of which Clifford Hudson is currently the sole owner. CEO and Chairman is Hudson, with Kathy Taylor as President and Scott McKinney as CFO. Cliff Hudson spent 35 years building Sonic Corp., selling SONC to Inspire Brands for $2.3B in December, 2018. Kathy Taylor was EVP and General Counsel at Thrifty Car Rental, leading to its sale to Chrysler Corporation. At that point, she and others purchased National Car Rental from General Motors, which was sold to Auto Nation. She has been involved in ownership and operation of a variety of other successful business, and is the former mayor of Tulsa, Oklahoma. Scott McKinney began his career as an investment banking analyst at AG Edwards & Sons and has completed over $20B of transactions in the retail space, working within firms including Barclays Capital and Lehman Brothers. Director Nominees include Sid Feltenstein, a very highly regarded veteran of restaurant operations and franchising, Kate Lavelle, also with extensive restaurant experience, and Scott McLain, with over 25 years of restaurant experience, including his stint as CFO at Sonic Corp.

CONCLUSION: Provided at the beginning of this article

Roger Lipton

SPACs – $1B RAISED IN RESTAURANT SPACE, A NO LOSE PROPOSITION FOR INVESTORS ? WHAT CAN GO WRONG?


SPACs – $1B RAISED IN RESTAURANT SPACE, $5B OF BUYING POWER, A NO LOSE PROPOSITION FOR INVESTORS ? WHAT CAN GO WRONG?

It should be no surprise to anyone that SPACs, or “blank check” companies, have become very popular. About $80B was raised in 2020 for use by these investment vehicles, and just about the same amount in only two months this year.

There are five SPACs, formed by Sponsors that have a background in the restaurant industry, in total raising about $1B, which can support a cool $5B or more in acquisition activity.  BurgerFi has been brought public, FAST Acquisition Corp (FST) is working to merge with  Tilman Fertitta’s hospitality empire, Tastemaker  (TMKRU) and Union Square Hospitality (HUGSU) have raised  funds and are conducting their search. Cliff Hudson (ex-CEO of Sonic) is planning a $125M offering.

THE REDEMPTION BACKSTOP

We’ve written before how Sponsors can make anywhere from 10x to 50x their investment over perhaps five years (hopefully less) with minimal risk if the SPAC funds are raised and if they have reasonable success managing the Business Combination (BC).

Public investors, typically at $10/unit, which consists of a share and some portion of a warrant, have an apparent “no lose” proposition because they can redeem their share for approximately $10 if they don’t approve of the BC. The Sponsor is given up to 24 months to complete a BC. Investors feel, therefore that they can “always” get their money back and they have substantial upside in the meantime because the SPAC Units often trade at a substantial premium to the $10 offering price well before the BC is completed. Before the BC comes to a vote, therefore, and redemption becomes an active  option, the SPAC investor has the opportunity to sell their shares into the marketplace, hopefully at a premium to the $10 issue price, and the warrant can be retained  as well.

THE PROBLEM

We’ve said “always” and investors in may feel “always” because nobody in a bull market worries about  technicalities, but that does not mean “any time”. The redemption right is only effective at the time of the shareholder vote, 24 months down the road. Between now and then, the SPAC Unit trades like a closed end fund, at a premium or a discount to the issue price. While it is true that most SPACs are currently trading at a premium to the $10 issue price, there is something like $100 billion worth of SPACs that have not formally proposed their BC and therefore could trade at a discount rather than the premium most prevalent today. When we consider that, with the hundreds of billions of dollars chasing deals, at least $5B (with leverage) in the restaurant industry  alone, lots of SPAC Sponsors will propose an obviously high price to complete a deal before time runs out. If the marketplace doesn’t like the appearance of the proposal, the SPAC shares could quickly go to a discount and investors would have to wait for the formal vote before redemption could be requested.

We can provide a couple of examples of this phenomenon.

AUCTION RATE SECURITIES

Fifteen years ago, prior to the ’08 –’09 financial crisis, a popular investment vehicle, Auction Rate Securities (ARS), became popular. Something like $200 billion of these securities were sold by underwriters, whereby investors could get a higher yield than was possible in money market funds. The ARS were invested in a variety of fixed income securities, including money market funds (who were guaranteeing $1.00/share) and a variety of other fixed income investments. There was an “auction” of each ARS portfolio every 7 to 35 days, whereby a new interest rate would be fixed. The underwriters “guaranteed” that an investor could “always” sell their ARS shares at $1.00/share, largely based on the fact that the ARS included (but was not limited to) money market funds.

In Feb’08, money market funds allowed their shares to “break the buck” because their portfolios were not liquid enough to meet redemptions, and the ARS market froze as well. Investors (including this writer) had their funds literally frozen, not redeemable at any price. There was an obscure technicality, under certain conditions, that allowed the ARS Sponsors to do this. As it turned out, the US Government guaranteed the hundreds of billions that had been invested in money market funds, which allowed the ARS Sponsors to redeem those shares, close to par value, as well. This process took about eighteen months. No harm, no foul, but it took a while.

THE GRAYSCALE BITCOIN TRUST (GBTC)

More recently, on December 22nd, we wrote about the Grayscale Bitcoin Trust (GBTC, a closed end fund owning Bitcoin). GBTC was, on 12/22/20, trading at a 40% premium to the Bitcoins that were held. GBTC today trades at a 12% discount. Bitcoin has gone from $22.3k to $48.2K (up 116%) and GBTC has gone from about $30/share to $41/share (up only 28%). Investors obviously haven’t participated anywhere as much as they anticipated in the Bitcoin “play”.

THE BOTTOM LINE

A prospectus for a SPAC  typically runs 200 pages, and contains a great deal of legal jargon. Just as was the case with Auction Rate Securities fifteen years ago, there could be some basis by which redemption might not be as easy as it seems. (It’s always easier to get someone to take your money than to get it back.) Setting that possibility aside: redemption of shares, anticipated in the prospectus to be close to the $10 issuance price of the Unit, is typically offered along with the shareholder right to approve the proposed Business Combination.

Between now and then, however, the investor funds are “at risk”. They can sell at a premium to the $10 redemption price (which has so far most often been the case), but discounts are possible as well. Investors in SPACs should not risk any funds that cannot stay in place until the Business Combination is proposed and the redemption provision becomes effective.

Roger Lipton