The online gaming industry is having a massive 2020. And a new entrant is making its mark. Landcadia Holdings II (NASDAQ:LCA), is having a nice start in early trading. Landcadia, once its merger closes, will become Golden Nugget Online Gaming and trade as “GNOG” instead of LCA. So what’s the outlook for LCA stock prior to the merger closing?
At first glance, things look great. Online sports betting is on fire right now. It would have been anyway, as sports betting legalization is rapidly progressing around the country.
Throw in the pandemic and it’s hard for people to go to physical casinos and sports books. That’s made online gaming properties all the more valuable as in-app action picks up.
The one drawback was that the virus had knocked out most live sports this spring and summer. It’s hard to have sports betting without the major professional sports. However, that’s largely resolved now. Pro basketball and football are back to successful operations, and other leagues such as college football are resuming some of their games as well.
While Landcadia has traded up from its initial $10 price, it hasn’t yet gone exponential like some of the other sports betting stocks. So what’s holding it back? One concern is that the company is primarily just in New Jersey for now. However, its geographical limitations are fixable with time. A bigger worry, however, is the unusual nature of this offering.
A Closer Look at LCA Stock
A big issue you run into with special purpose acquisition companies (SPACs) such as this one can be misaligned incentives. A traditional initial public offering (IPO) is a well-known process that tends to be fair and understood by all involved parties. SPACs, however, can have a different mix of priorities.
The deal sponsor, in particular, has huge incentive to get a deal done within the two-year window a SPAC has to complete a deal. After all, the SPAC sponsor typically gets 20% of the company in return for putting the deal together. However, if they can’t consummate a deal, the SPAC backer generally returns the cash to early investors, earning nothing for their trouble. Thus, there is motivation to close a deal — any deal — to make sure they get paid.
That’s already not ideal. In this case, there’s another level to it. You see, billionaire Tilman Fertitta is on both sides of the table here. He is the backer of the Landcadia SPAC. He’s also the owner of the Golden Nugget Casino, who is selling the digital gaming property to Landcadia. Thus, Fertitta is, in a way, selling his own property to himself, while charging a fee to outside investors for shuffling paper.
This is not necessarily wrong or unethical in any way, as everything is clearly disclosed. It is, however, quite unusual. It’s certainly something investors might not look kindly on if we weren’t in a raging bull market.
Distressed Seller?
Adding to the related party transaction, as discussed above, there’s another interesting factor to think about. That’s that Fertitta appears to be in a financial bind. That’s not surprising, given the nature of the novel coronavirus.
Fertitta built his empire primarily in the hospitality industry, with major holdings in things such as casinos and restaurants. As such, the travel shutdown crushed several parts of his empire simultaneously. And even as things come back to life, Fertitta’s businesses will be slower than most to recover due to social distancing measures.
The billionaire is already paying the price. Reportedly, Fertitta had to issue $250 million in bonds earlier this year at a staggering 15% annual interest rate to raise much-needed liquidity. Bloomberg’s report stated that this was the highest interest rate ever offered for a levered U.S. corporate loan by an entity that hadn’t already filed for bankruptcy. That’s a bad look, to put it mildly.
Given this backdrop, the whole Landcadia situation is most intriguing. This looks like an excellent opportunity for Fertitta’s entities to raise some cash selling off a large piece of one of his most virus-resistant assets. Given the need for liquidity, investors could be getting a bargain price.
With the success of DraftKings (NASDAQ:DKNG) and other sports betting names this year, Golden Nugget probably would have been worth more in a traditional IPO. But when you need money, speed is of the essence. Using a SPAC deal to sell a property to an entity you also control is certainly one of the quicker options for getting liquidity.
LCA Stock Verdict
It’s important to discuss the interesting backstory to this transaction as it’s key in determining why this offering has been made available to the public now.
On the face of it, LCA stock looks like a bargain, particularly compared to DraftKings and Penn National Gaming (NASDAQ:PENN). If this were a normal IPO, it’d be easy to slap a bullish outlook on this.
And in this upbeat market for new issues in general and sports betting in particular, the smart money is still on LCA stock going up. I’m not going to argue with the consensus here. It’s possible that the backer’s financial struggles have actually created the opportunity here; motivated sellers often let go of assets at good prices.
Just be aware of what you’re going into. You’ve got a motivated and potentially desperate seller orchestrating a related-party transaction. That’s not too common in American public markets, and leaves you vulnerable to certain risks that wouldn’t happen in most other stock offerings. It doesn’t make LCA stock uninvestable by any means, but it’s worth spending an extra minute looking at the proxy statement here before you invest.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.
