Landcadia Holdings (NASDAQ:LCA) signed a merger agreement with Golden Nugget Online Gaming on June 29. Although LCA stock has already moved up from its $10 IPO price to $15.29 as of Friday, Aug. 28, the stock could easily double after the reverse merger.
This is based on what happened with a similar stock, DraftKings (NASDAQ:DKNG). That stock originally started out as a special purpose acquisition company (SPAC). But once its reverse merger closed, the newly named stock essentially doubled from the period when it was announced. That is when the stock symbol changed to DKNG.
When Landcadia merges with Golden Nugget Online Gaming, the new symbol will be GNOG. That is also when a good number of investors may take a position in the merged company. Right now a date has not been set, but the merger is likely to occur sometime in September or October.
All About Golden Nugget Online Gaming
Golden Nugget Online Gaming just revealed its second-quarter earnings on Aug. 18. This was done even though it is still a private company and has not yet merged with Landcadia Holdings. After all, its owners and managers will still be the dominant shareholders of the merged company, once it merges with LCA stock and effectively goes public.
The GNOG earnings report showed that the company made record earnings of $24.8 million in net revenue and $8.5 million in operating income. That operating income was up 74% year-over-year. GNOG launched in 2013 and became profitable in 2016. The company made net income of over $11 million in 2019.
By contrast, DraftKings had higher revenue of $70.9 million in the last quarter, but lost $161.4 million on an operating basis. So GNOG is much more profitable than DKNG even on an operating basis.
Right now Golden Nugget Online is operating only in New Jersey. It has applied for online gaming approval in Pennsylvania and Michigan as well. In its slide presentation, Golden Nugget Online said the addressable market opportunity is $20 billion annually.
Valuing the Merger Deal
The deal is valued at a pro forma enterprise value of approximately $745 million, or 6.1 times estimated 2021 revenue of Golden Online, which comes in at $122 million. However, that valuation assumes the original LCA IPO price of $10 per share.
We have to revalue the company now that LCA stock has risen over 50% to over $15 per share. Moreover, there will be more shares outstanding after the merger, so the pro forma market capitalization will be higher.
For example, LCA stock has a pro forma market capitalization right now of about $1.04 billion at $15.29 per share (using the Aug. 28 closing price). This is based on 68 million shares outstanding after the merger, based on the investor slide presentation.
However, the new combined company will have $690 million in cash and $150 million in debt, or roughly $542 million in net cash. Therefore, its net effective enterprise value (EV) will be $1.04 billion less $542 million in net cash, or $498 million in enterprise value. This figure differs from what the company presented because it does address how the $690 million in cash will be used.
Even assuming GNOG uses the $690 million in cash to pay off debt, and it ends up with $150 million in debt and $88 million in cash, the revised EV is $1.1 billion. Given the estimated 2021 revenue of $122 million, that is just 9 times revenue.
By contrast, DraftKings is much more expensive. It has a $13.1 billion market cap and an EV of $11.66 billion since it has $1.2 billion in net cash. Estimated sales for 2021 are $748 million. Therefore, its EV-sales ratio is 15.5 times.
What Should You Do With LCA Stock?
The difference in valuation between LCA stock and DKNG stock is 72.2%. Moreover, if my original calculation is correct, LCA — soon to be GNOG — may actually have a much lower ratio.
Using that calculation, it would have a pro forma EV of just $498 million or 4 times estimated 2021 sales of $122 million. That makes the difference between 15.5 times for DKNG and LCA/GNOG almost 400%.
To make things simple, I estimate that LCA stock is at least 100% undervalued. That is, I would expect LCA stock will rise to at least $31 per share once the merger goes through.
On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.