If there's a hot spot in the market where the money flows freely, it won't take long for someone to exploit the momentum of the sector. Maybe greed is a better word.
There's no doubt special purpose acquisition companies (SPACs) have been hot. Both Rev Shark and I have written about them extensively of late. The majority of those writings have been about trade opportunities, trade management and the momentum behind the group. I think it's fair to say Monday threw me the first major yellow flag of caution outside of price action.
You see, I can deal with price action. We all can. Entries. Profits. Trails. Scales. Stops. It's no different than other sector or indexes, but what if a SPAC becomes more than a traditional SPAC?
We certainly had hints of that with Bill Ackman's plan. Taking a minority position in an already public mega-cap company is more like an activism fund or single-stock fund. Different, but not a flag. Our flag comes from the announcement that Landcadia Holdings II (LCA) entered into a purchase agreement to acquire Golden Nugget Online Gaming.
Landcadia Holdings II is a SPAC co-sponsored by Fertitta Entertainment and Jefferies Financial Group. Fertitta Entertainment is owned by Tilman Fertitta.
Golden Nugget Online Gaming is a U.S. online real money casino owned by Tilman Fertitta.
Read that again.
This isn't even an Einhorn is Fickle moment. This is a Fertitta is Fertitta moment.
If you want to be a glass-half-full kind of person, then call this the most creative spinoff in history. The market has found a new use for SPACs.
On the surface, the metrics don't look bad. There's a lack of pure iGaming names for traders and investors, but here's where another flag comes into play.
Tilman Fertitta took a $300 million loan to help his entertainment empire during the Covid-19 crisis. That $300 million loan is being absorbed by the new entity, one of the smallest pieces of Fertitta Entertainment ($57 million in revenue out of $5 billion). Half the loan will be paid with the cash in the SPAC trust while the other half will be assumed by the merged LCA and Golden Nugget Online Gaming. Did I mention Tilman Fertitta will hold a controlling voting interest in the combined companies? The dual-class structure will give Fertitta super voting rights.
With LCA rocketing to $16, the deal now values Golden Nugget Online Gaming around 10x next year's estimated revenues with a market cap around $1.2 billion. The company is focused on iGaming, although it may entertain sports betting. If it does allow sports betting, you won't find a card with the Houston Rockets on it given Fertitta's ownership of the NBA franchise.
I could roll through the company's metrics and how they compare, but I'll sum that up by saying it is a known name in gambling, and without the debt assumption the deal price wasn't bad, but the structure leaves a sour taste in my mouth. This deal appears to be more about bailing out Fertitta Entertainment than anything. Just the annual interest savings on the $300 million will be greater than several years of net profit from the online company. And that debt will weigh on Golden Nugget Online Gaming's path to profitability given it comes at 14%. Add in that most of the cash is burned in the merger.
So, out of the $322 million cash held in trust, here's what we see. We already know $150 million is going toward debt repayment. Another $24 million goes toward debt repayment fees! So, in reality, $174 million in cash is going toward debt inherited from the huge parent company. As if that weren't enough, $30 million cash goes toward Golden Nugget's parent, Fertitta Entertainment. That's right: Tilman Fertitta is going to get a $30 million check to have a SPAC he controls buy a company he controls. Finally, another $30 million will go toward transaction fees.
That leaves $88 million in cash and $150 million in debt at a ridiculously high interest rate for the new company.
This is exactly what I don't want to see. It's in a hot area, so the stock will get play for now, but the companies we discussed here already are hitting the ground running with no debt and hundreds of million in cash, sometimes a billion. Golden Nugget Online Gaming will hit the ground running with debt nearly twice cash before the end of year one.
This almost reminds me of a mortgage-backed security. Fertitta has packaged up a prime business (Golden Nugget Online Gaming) with junk ($324 million in debt and fees) and is paying himself $30 million to do so.
It's good work, if you can find.
Will I consider trading this? Sure. If there's a trade to be had, but I don't think I would want to own this. Fertitta has shown from day one that his focus is on his interests, not his shareholders. Fertitta Entertainment, his private company, is going to come out well ahead of Golden Nugget Online Gaming from this day forward.
