The Stench Emanating From Landcadia Holdings II Is Palpable

A Nov. 9 press release from Pennsylvania-based mergers and acquisition litigation specialist Brodsky & Smith LLC caught my attention. It centers around the pending merger between special purpose acquisition company Landcadia Holdings II (NASDAQ:LCA) and Golden Nugget Online Gaming Inc. If you own LCA stock, you might want to reconsider your position.

A man looking at a computer with poker chips on the screen.
Source: rawf8/

Here’s why.

LCA Stock and Obvious Self-Dealing

Having written about investments for over a decade, I’ve become immune to the press releases issued by law firms looking for enough investors to sign on to a class-action lawsuit to get it certified in the courts.

However, there’s big money to be made from these lawsuits. And sometimes they’re even justified. Brodsky & Smith’s press release laid out why it is seeking investors to come forward.

“[I]t is investigating potential claims against the Board of Directors of Landcadia Holdings II, Inc. (“Landcadia” or the “Company”) (Nasdaq:LCA) for possible breaches of fiduciary duty and other violations of federal and state law in connection with recent corporate actions, including the Company’s Purchase Agreement to acquire Golden Nugget Online Gaming, Inc. (“Golden Nugget”), a US online real money casino owned by Tilman Fertitta,” the press release states.

In a nutshell, the law firm is investigating whether billionaire Tilman Fertitta was self-dealing when Fertitta Entertainment — controlled by Fertitta and a sponsor of the SPAC — entered into a merger agreement with online operations of the Golden Nugget casino, also controlled by Fertitta.

It should seem pretty darn obvious that’s what was happening in this instance, but it doesn’t necessarily make it improper.

If investors chose to pony up capital to Landcadia Holdings II — it raised $275 million in May 2019 — when they knew full well that Fertitta was chief executive and in charge of the management team searching for a combination target, they also should have realized that a target such as Golden Nugget’s online gaming operations wasn’t outside the realm of possibility.

“While we may pursue an initial business combination target in any industry, we intend to focus our search on investment opportunities in the consumer, dining, hospitality, entertainment and gaming industries, including technology companies operating in these industries,” stated its IPO prospectus.

Two words: Technology and gaming. These should have been a big tip-off.

And then there was the financial condition of Fertitta’s empire.

The Billionaire Has No Clothes

In September, I recommended that investors pass on LCA stock because there were better gaming opportunities among current and former SPACs.

One particular concern with Fertitta’s involvement in the SPAC is that the billionaire’s financial well-being has been in question ever since leveraging big time to buy the NBA’s Houston Rockets in 2017. Add in Covid-19, which has been a punch in the gut to hospitality and in-person gaming businesses, and you’ve got a motivated buyer and seller.

“Fertitta, who is said to be worth $5.8 billion, is the poster child of the low-interest rate era that we find ourselves. He’s used debt to build his restaurants, hotels, and sports teams (he owns the Houston Rockets),” I wrote on Sep. 18.

“In April, Fertitta’s Golden Nugget sold $250 million in debt at 15% interest to keep his empire afloat. Fansided published an article in March that questioned the billionaire’s financial wherewithal to buy the Houston Rockets in September 2017.”

I suppose you could argue that Fertitta’s current predicament is nothing but unfortunate timing. To take Golden Nugget’s online gaming operations public at this point, considering the success of DraftKings (NASDAQ:DKNG), is a perfectly sensible transaction.

If not Landcadia Holdings II, some other gambling-focused SPAC might have stepped forward to accommodate Fertitta’s plans.

If the target’s business case is a good one — Golden Nugget’s Q3 2020 results include a 93% increase in gross gaming revenues to $28.9 million with a 92% increase in operating income to $8.2 million — and the valuation is reasonable, shareholders of record as of Oct. 29 ought to be willing to vote in favor of the combination when the special meeting to vote takes place.

In the proxy materials for the special meeting, Landcadia highlights that the merged entity will have an enterprise value of $745 million or 6.1 times its estimated 2021 revenues of $122 million. DraftKings is trading at 40 times sales. Further, it’s been profitable since 2016.

What’s not to like?

The Bottom Line

If you read the proxy materials closely, you will see that Tilman Fertitta will be chairman and CEO of Golden Nugget Online Gaming. Fertitta Entertainment and the man himself will own 52% of the company.

More importantly, Fertitta gets out from under some of the debt owed to his creditors while retaining control of a profitable business.

The whole thing might stink to high heaven, but it appears to be a perfectly legal maneuver.

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.

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