Category Archives: Entertainment

Luby’s sells most of its operations

SBG San Antonio

Luby’s has announced that it will sell most of its operations in two separate transactions. The company has been struggling for years and, in November 2020, it agreed to liquidate its assets and dissolve the company.



Prior to the decision to liquidate, the company had 61 Luby’s branded restaurants (mostly in Texas), 24 Fuddruckers restaurants that were owned and 71 that were franchised. However, a number of the Luby’s had closed due to the pandemic.

The company also operates culinary contract services that offered on-site food services for healthcare facilities, colleges and sports stadiums. It also made sales through retail grocery outlets.

32 of the Luby’s restaurants and the brand name will be sold to a newly-formed affiliate of Calvin Gin. Approximately 1,000 workers at those restaurants will be offered positions by the buyer. Mr. Gin is part of the family that established the Flying Food Group, the third largest airline catering company in North America. The business also provides food preparation services for Starbucks.

The buyer is not paying paying any cash for the business but assuming operating liabilities and giving Luby’s a loan note. Luby’s anticipates the total value to be $28.7 million. The real estate for 25 of the 32 locations is owned by Luby’s. This is not part of the transaction and will be auctioned off by the company separately.

The Fuddruckers franchise is being sold to Nicholas Perkins, a Washington, DC-based entrepreneur for an estimated $18.5 million. Again, the payment is in the form of assumed operating liabilities and a loan note. Mr. Perkins previously acquired most of the company-owned Fuddruckers restaurants.

Once these transactions are completed, Luby’s will be left with a handful of company-owned Fuddruckers, the culinary contract service business and the retail sales.

However the main value will be derived from the sale of real estate which comprise most of the liquidation net asset value of $117 million. The company currently has 63 properties in total. The share price is $3.85, giving it a market capitalization equal to its liquidation value.

SEC filing – Luby’s sale

SEC filing – Fuddruckers sale

Two more Houston blank check companies file for IPOs

On Friday 12 February, a record 28 blank check companies filed for Initial Public Offerings (IPO), including two old favorites in Houston. Tilman Fertitta filed for his 4th blank check company, Landcadia Holdings IV, while Graf Acquisition Corp filed their 2nd.



In case you are wondering why Friday was so popular it’s because it was the last day a company with a calendar year-end can file for an IPO using a September 2020 balance sheet.

Landcadia and Graf History

Landcadia Holdings IV filed for a $500 million IPO. As before, the shareholders are Tilman Fertitta and Jefferies. As before, they are seeking companies that operate in the consumer, dining, hospitality, entertainment and gaming industries.

  • Landcadia III just went public in October 2020 and raised $500 million in its IPO. Last month it agreed to buy The Hillman Group for $2.64 billion in a reverse takeover.
  • Landcadia II raised $275 million in May 2019 and acquired Golden Nugget Online Gaming (a Fertitta company) in December 2020.
  • Landcadia I raised $250 million in June 2016 and acquired Waitr in November 2018.

Graf Acquisition Corp II filed for a $225 million IPO, same as the first Graf IPO that was completed in October 2018. The CEO is James Graf. Graf I completed its reverse takeover of Velodyne Lidar in September 2020.

Popularity of SPACs

Special Purpose Acquisition Companies (SPACs) or blank check companies as they are also known, have really taken off in the past couple of years, mainly because of the disadvantages in the traditional IPO route where the process is long (6-7 months) and the valuation (i.e. price) at completion is uncertain.

Furthermore, the investment bankers like their IPOs to be heavily oversubscribed and for the share price to ‘pop’ on the first day of trading. But that means that the selling shareholders have effectively given up part of their returns to the new shareholders.

In contrast, a blank check company can go public in 2-3 months and then spend the next few months negotiating a deal in secret with a potential target company. In this way, both the original sponsor and the shareholders of the target can generate a better return.

S-1 Landcadia Holdings IV

S-1 Graf Acquisition Corp II

Fertitta Entertainment to go public via reverse takeover

Fertitta Entertainment Inc (‘FEI’), the parent company of Landry’s restaurants and Golden Nugget casinos is to go public through a reverse takeover of FAST Acquisition, a blank check company.

The transaction values FEI at $6.6 billion enterprise valuation.



Tilman Fertitta, the sole owner of FEI, will continue to the be the Chairman and CEO of the company and will remain the largest shareholder, owning about 59% after the deal closes.

The business operates 446 full service restaurants such as Morton’s steakhouse, De Frisco’s, Saltgrass and Rainforest Cafe. It also owns 5 Golden Nugget Casinos in Atlantic City, Las Vegas, Laughlin, Lake Charles and Biloxi.

Both the restaurants and the casinos seem to be holding up better than its publicly-traded competitors.  For the third quarter of 2020, revenues for the restaurant division were $494 million, down 32% on the same quarter in 2019. However, adjusted EBITDA was $101 million, down only 17% on the corresponding period.

For the casinos, third quarter revenues dropped 30% to $176 million. However, adjusted EBITDA only dropped by $6 million to $72.5 million (41.1% margin).

FEI also owns 79.9% of the voting rights of Golden Nugget Online Gaming. This business was sold by FEI in December 2020  to a blank check company that had been launched by Mr. Fertitta (Landcadia Holdings II).

Landry’s was public before

Landry’s originally went public in 1993 when it had 9 restaurants. In 2010, the business had 200 restaurants and Mr. Fertitta took it private in a $1.4 billion transaction.

Mr. Fertitta had considered going public via an Initial Public Offering (IPO) but decided that he could access capital markets faster and with more certainty if it did a deal with FAST.  The blank check company went public in August 2020 and was led by Sandy Beall, an experienced restauranteur and hospitality founder.

FEI also owns the Houston Rockets. That business is not part of the transaction.

The deal is expected to close in the second quarter of 2021.

SEC filing – FEI FAST acquisition

 

Blank check company completes acquisition of online gaming business

Landcadia Holdings II, a blank check company launched by Tilman Fertitta, has completed its acquisition of Golden Nugget Online Gaming (GNOG). The transaction was originally announced in June 2020.

Landcadia II went public in May 2019. GNOG was a subsidiary of Landry’s the restaurant and casino business owned by Mr. Fertitta.



Currently GNOG is involved in online casino gaming in New Jersey, where it has a 13% market share. It is planning to expand into Pennsylvania, Illinois, Michigan and West Virginia, where online betting is now legal. It is not planning to enter the sports betting market, where DraftKings is dominant. GNOG may be precluded from betting on NBA games as Mr. Fertitta also owns the Houston Rockets.

For the nine months ending September 2020, GNOG had revenues of $68 million and operating income of $22.5 million. Revenues and operating income are up about 75% on the comparative period.

Consideration

Landcadia II is paying $542 million for GNOG., This includes $314 million in equity, $30 million in cash and $150 million repayment of debt owed by GNOG. There is also $48 million of consideration in the form of debt repayment fees and a tax receivable agreement. GNOG is also taking on $300 million of debt which was used to fund a capital distribution to an affiliate of Mr. Fertitta.

Mr. Fertitta owns 11.3% of the equity post-close. However, due to the dual class structure, he owns 79.9% of the voting rights. Jefferies, the financial partner of Mr. Fertitta, received a $11.1 million underwriting fee as a result of the transaction. It will also receive fees of $3.75 million for being the exclusive financial and capital markets advisor.

Management

Mr. Fertitta will serve as the Chairman and CEO of GNOG. Thomas Winter will be the President. He joined Landry’s in 2013 as the General Manager of the online gaming division He has a lot of experience in online gaming gained in Europe.

Michael Harwell will be the CFO, subject to gaining regulatory approval from the New Jersey Division of Gaming Enforcement. He was the Chief Accounting Officer of Independence Contract Drilling until May 2020.  However, he worked for Landry’s for seven years prior to that.

Landcadia III

Landcadia Holdings III, the third blank check company launched by Mr. Fertitta and Jefferies, went public in October.

SEC filing – Golden Nugget Online Gaming

 

 

 

Hospitality company settles with SEC over executive perks not disclosed

RCI Hospitality has agreed to settle with the Securities and Exchange Commission (SEC) over allegations that it failed to disclose $615,000 in executive compensation in the form of perquisites.

The company has agreed to pay a civil penalty of $400,000. Eric Langan, CEO, has agreed to pay 200,000 while CFO Phillip Marshall, who stepped down last week, will pay $35,000. However, the company did not admit to or deny the findings of the SEC.



RCI operates 38 live-adult entertainment clubs and 10 Bombshell restaurants (the SEC amusingly calls them military-themed!). Due to the pandemic, only 34 were open at the beginning of September. The company’s head office is in NW Houston.

The SEC inquiry began after anonymous bloggers started posting a series of allegations in mid-2018. You can read their reports here and here.

The findings

Among the many findings of the SEC;

  • Langan and Travis Reese, Executive VP – who both hold pilot’s licenses – used RCI-owned aircraft for personal use. The value reported in the annual proxy was the tax value of its use, not the aggregate incremental cost.
  • RCI reimbursed Langan for trips that he took with his girlfriend or for trips that she took alone. This was not disclosed as executive compensation.
  • RCI reimbursed Langan for the use of automobiles by the executives and their families. Only the depreciation of the vehicles was disclosed as compensation.
  • Marshall commuted weekly from his home in Dallas to the Houston corporate office. However, the company failed to disclose the housing and meal allowances it provided Marshall.
  • The company failed to disclose that Langan’s girlfriend was on the payroll between 2014 and 2019, even though she was, effectively, his personal assistant.
  • Between 2014 and 2019, Langan, who lives in Bellaire, directed the company to make $119,655 of donations to the private school that two of his children attended.
  • The company hired Langan’s father and brother to make almost $500,000 worth of patio furniture for the Bombshell’s restaurants. This was not disclosed.

The SEC founds that the company’s internal controls were lacking. However, it noted that the company has been undertaking remedial efforts including hiring outside counsel to conduct an independent investigation and implementing new internal controls and policies.

https://www.sec.gov/litigation/admin/2020/34-89935.pdf

Hospitality Group appoints new CFO

RCI Hospitality has promoted Bradley Chhay to CFO, replacing Philip Marshall, who is retiring from that role. Mr Chhay joined the company in November 2015 as Controller. He had previously worked for Live Nation and RigNet.

Mr Chhay, age 36, will have a base salary of $400,000. Mr Marshall, age 70, had been the CFO since May 2007. He will stay on at the company, focusing on income tax matters.

RCI operates adult nightclubs such as Rick’s Cabaret and restaurants and sports bars under the Bombshells brand name. It has 48 units in total, though only 34 were open at the beginning of September. The company’s head office is in NW Houston.

Like other hospitality businesses, it has been hit hard by the pandemic. Revenue for the three months to June 2020 were only a third of revenues from the comparable period, though the company states that business has somewhat recovered since. It managed to generate a positive cash flow in the quarter as a result of deferring payments that are real estate related.

Last year, the company came under fire from anonymous short sellers who alleged a series of related party transactions that were not disclosed in SEC filings. The company conducted an internal review that mostly vindicated ‘Big Rick’, the anonymous blogger. It also strengthened its related party transaction policy and vowed to appoint at least one independent director.

A formal SEC investigation into the company is still ongoing.

So, I find it amazing that the SEC filing announcing Mr Chhay’s appointment also disclosed that his brother holds a $100,000 promissory note from the company. It’s good that the company correctly disclosed it, but it shows the pervasive amount of related party transactions.

 

SEC filing – RCI Hospitality CFO appointment

Tilman Fertitta blank check company to buy business from Tilman Fertitta

Landcadia Holdings II, the blank check company that went public in May 2019, has agreed to buy Golden Nugget Online Gaming (GNOG) from Landry’s, the restaurant and casino business owned by Tilman Fertitta.

After the IPO, Mr Fertitta still owns 21% of Landcadia II. Jefferies, the financial backer, owns 10%.



The transaction will result in a combined enterprise value of $745 million, which is approximately 6.1 times estimated 2021 revenues of $122 million. Landcadia II is paying $30 million in cash and issuing equity worth $314 million. In addition, the buyer is paying down $150 million of debt of GNOG, plus related prepayment fees ($24 million) and transaction fees ($30 million).

GNOG currently pays its parent company a 3% royalty rate on net gaming revenue and will continue to do so, even after it is acquired by Landcadia II.

Currently GNOG is involved in online casino gaming in New Jersey, where it has a 13% market share. It is planning to expand into Pennsylvania and Michigan, where online betting is now legal. It is not planning to enter the sports betting market, where DraftKings is dominant.

DraftKings recently went public and has projected revenues in 2021 of $733 million. It has an enterprise value of over $11 billion. The pandemic has led to an increase in online betting and gaming and a rise in valuation of companies involved in that business.

The transaction helps divert cash to the struggling Landry’s business. The business operates many restaurant chains including Saltgrass Steak House, and Bubba Gump Shrimp. It also owns 5 Golden Nugget casinos. Understandably, the businesses have been hard hit by the economic downturn caused by COVID-19 and furloughed 45,000 employees at the peak.

The transaction is expected to close in the third quarter. Afterwards, the company will be renamed Golden Nugget Online Gaming and will change its Nasdaq trading symbol to GNOG.

Landcadia I, the first blank check company formed by Mr Fertitta, acquired Waitr in November 2018, an online food ordering and delivery service. It’s had a rough time since them (3 CEOs and 3 CFOs!) but business has picked up a bit during the pandemic.

SEC filing – Landcadia to buy GNOG

CFO of Houston-based restaurant group departs

Scott Gray, the CFO of Luby’s, has left his role with immediate effect. No successor has yet been named.

Luby’s operates 119 restaurants in the US, including 41 Fuddruckers locations. They are also the franchisor for 97 Fuddruckers franchise locations. Not surprisingly, they have been hard hit by the coronavirus pandemic.



Mr Gray joined the company in 2001 and became the CFO in 2007. He had a base salary of $342,000 before it was reduced, temporarily, last month to $171,000. He will receive a severance of $105,231 to be paid over 6 months.

Mr Gray will also receive the immediate vesting of 31,028 restricted stock units and the vesting of 83,666 stock options at a strike price of $2.82 per share. Those options are out of the money as the current share price is $0.81.

In fact, last week, the company received a delisting notice from the NYSE as its share price had been below $1 for at least 30 consecutive trading days. To regain compliance, the company has to bring its average share price back above $1.00 within six months.

The company was also in the news last week as it was a recipient of a $10 million Paycheck Protection Program (PPP) loan under the CARES Act. Luby’s is one of seven Houston-area public companies that received a PPP loan. The others are Applied Optoelectronics, EnGlobal, Flotek, Gulf Island Fabrication, RiceBran and Sharps Compliance.

SEC filing – Lubys CFO departure

 

 

Houston hospitality company releases findings prompted by anonymous bloggers

RCI Hospitality has announced its findings following an SEC inquiry and allegations by certain anonymous internet bloggers. These involve related party transactions and undisclosed perks enjoyed by senior management. The company had delayed its quarterly filings due to the investigation.

RCI operates 39 adult nightclubs (including Rick’s Cabaret) and 8 restaurant/bars under the Bombshells brand name.

In short, Big Rick Invest & Detroit Bear, the anonymous bloggers, were substantially vindicated!



You can read Detroit Bear’s extensive article here.

Special Committee

An international law firm was hired to conduct a review and found the following;

  • RCI paid Ed Anakar, Director of Operations, between $471,154, $450,000 and $375,000 for the three years ended September 2018. Ed Anakar, his brother is a director and supposedly an independent one. (That wasn’t too difficult to figure out as company stated this in its 10-K!)
  • A company (Sherwood Forest Creations) owned by the brother of Eric Langan, the CEO, was hired to make furniture for the Bombshells locations. The company was paid $633,000 over 3 years.  (Big Rick made no mention of this company. Instead he alleged that the construction company (Tannos Construction) hired to build the Bombshell bars was part owned by the CEO. This is not mentioned in the review).
  • Personal use of aircraft by the CEO and CTO Travis Reese was incorrectly calculated for 2018 and not included in the 2017 and 2016 annual statements. The correct amounts for the CEO are $96,797, $79,748 and $55,101 respectively. (Big Rick nailed this one – he also stated that the CTO, the number 2 executive in the company, happens to be a pilot).
  • Not disclosed in the annual reports was that Steve Jenkins, a director, filed for Chapter 13 bankruptcy in Aug 2010 and October 2015 (the bloggers missed this one).

There was no mention of the allegations by Big Rick that another of the independent directors is an attorney who has represented the company in previous lawsuits. Nor did they cover the alleged loans to the CEO from the company, Ed Anakar ($90,000) or from an independent lawyer that does work for RCI ($38,500). (It could be that the scope of the independent investigation was somewhat limited).

Proposed Actions

The audit committee and the Board of Directors anticipate taking the following actions

  • Appoint at least one new independent director
  • Appoint a Chief Compliance Officer will report to the audit committee
  • Strengthen the related party transaction policy
  • Adopt an enhanced code of conduct policy
  • Adopt an airplane policy outlining personal use by employees
  • Sell three residential houses that the company owns in Houston (the bloggers got this one right).



Auditors resign

In addition, last week, the company also disclosed that the external auditors, BDO, were resigning as the company’s auditors as BDO believes that

” the company has not performed sufficient investigatory procedures and has not taken timely and appropriate remedial action in response to certain deficiencies that BDO thinks exist in the way the internal review has been conducted, including:

  1. undue restriction on the scope of the internal review;
  2. failure to initiate certain forensic procedures;
  3. refusal to provide BDO access to pertinent interview summaries and other documents;
  4. lack of assessment as to the impact of the matters identified to date on existing and future regulatory filings, including financial statements related footnotes;
  5. restrictions, based on privilege, hindering BDO’s ability to properly shadow and evaluate the adequacy of the internal review.”

The company disagrees with BDO’s assessment.

Personal guarantees from CEO

Eric Langan has been the CEO since 1999. He has a base salary of $1 million and owns 7% of the company. Unusually for a public company, he also personally guarantees all of the commercial bank indebtedness of the company. That probably makes it harder for an activist investor to get involved.

Big Rick vindicated!

Back in June 2018, when Big Rick Invest started publishing the allegations, the share price of RCI was $30.  He believed it was worth between $14.32 and $17.41 a share. The current share price is …$16.07.

SEC filing – RCI Hospitality

 

Houston CFO moves – week ending May 12

John Vollmer, CFO of Patterson-UTI Energy (PTEN) announced that he plans to retire by the end of the year. His retirement will become effective after a transition period following the employment of his successor. Patterson-UTI operates one of the largest fleets of US land-based drilling rigs and pressure pumping equipment. The company recently acquired Seventy Seven Energy for $1.8 billion.

Dave Hiscocks has been appointed Corporate Controller and Corporate Secretary at Synthesis Energy Systems, a publicly-traded clean energy company with its head office in the Galleria area. Mr Hiscocks was formerly the Regional Controller-Eastern Hemisphere at Noble Corporation. Scott Davis, the Chief Accounting Officer of Synthesis, has resigned from the company.

Ty Lawrence has been promoted to the position of VP, Treasury and Investor Relations at McDermott International. He joined the company in 2013 and was previously the Senior Director of Finance for Americas, Europe and Africa. McDermott is a publicly-traded Engineering an Construction company with its head office in West Houston. Mr Lawrence replaces Kathy Murray who has been appointed VP of Finance for Project Execution and Delivery.

Craig Bourgeois has been named CFO of The Center for the Performing Arts at The Woodlands, home of the Cynthia Woods Mitchell Pavilion. The Pavilion consistently ranks in the top 5 venues in the world for outdoor concert ticket sales. Previously, Mr Bourgeois served as the VP and Treasurer, North America at Trimac Transportation. Prior to joining Trimac in North Houston, he worked at Shell Oil. Mr Bourgeois replaces Brian Pate, who left after less than two years as CFO.