Why Golden Nugget IPO is no piece of cake

Tilman Fertitta’s plan to take his Golden Nugget casino business public has not been well received by Wall Street.

Last month, the Texas billionaire told CNBC that he wants to list a minority stake in Golden Nugget on a public stock exchange. But Wall Street says that plan is no piece of cake, due to the company’s sagging sales and $4 billion debt.

Sadly, Fertitta’s IPO effort comes on the heels of a failed effort to raise private funds last year. A Golden Nugget spokesperson reported that Fertitta did not initiate any sales talks during 2020.

Before the pandemic caused widespread, government-mandated shutdowns, Fertitta had been quietly looking to sell up to a 49% stake in the Golden Nugget franchise; Golden Nugget boasts five casinos across the country, and 600 casual dining restaurants. The restaurant chains include Morton’s The Steakhouse, Landry’s Seafood, Bubba Gump Shrimp, Del Frisco’s Steakhouse, and McCormick & Schmick’s.

Interest in the Casino, Not So Much in the Restaurants

While there was some interest in the Golden Nugget Casinos, investors were not as interested in the restaurants, that’s because Fertitta had been seeking a multiple of more than 10x earnings. Even before the pandemic prompted state and local governments to shut down “non-essential” businesses, restaurants were not seen as a growth business.

Prospects for finding investors for the restaurants only worsened once the lockdowns hit, which led Fertitta to seek a minority investor for the casinos alone. Unfortunately, that effort came up short.

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Little Value Beyond Debt

The problem is that Golden Nugget appears to have little value beyond the debt, which currently stands at around $4 billion; much of that debt occurred in 2017 to Fertitta to finance a $1.4 billion dividend, so he could purchase the Houston Rockets for $2.2 billion.

Currently, Golden Nugget generates around $400 million in earnings before interest, taxes, depreciation, and amortization. This key financial metric gives Golden Nugget a 10-to-1 debt-to-earnings ratio.

Even if earnings over the next year were to increase to $500 million as hopefully, coronavirus restrictions are lifted, Golden Nuggets would only be worth nine times its earnings before interest, taxes, depreciation, and amortization. That gives it little value for stockholders.

Waitr Holdings Fails to Deliver

Other concerns include Waitr Holdings, Fertitta’s publicly traded food delivery business. Since Fertitta’s blank-check company purchased it in 2018 for $308 million, it has failed to deliver. At the time of purchase, the deal sent Waitr stock up to more than $12 a share.

But the food delivery company closed on New Year’s Eve at just $2.78 a share. Unfortunately, Waitr has lost out to competitors like Postmates and DoorDash.

“I don’t think the public markets will accommodate him,” a banker who has worked with Fertitta on fundraising efforts said. “I think Waitr hurt him.”

Golden Nugget Online Gaming

Fertitta did manage to take his casino chain’s online gaming business public as Golden Nugget Online Gaming Inc. However, it closed down 12% on its second day of trading.

The casino magnate wants to use the money from the IPO to reduce Golden Nugget’s $4 billion debt and to also make new, more diversified investments.

Fertitta has earned $300 million in dividends through Golden Nugget last year. He also refinanced the company so that principal payments are not due until late in 2023. That move will help to stave off the risk of bankruptcy, due to the widespread, government-mandated shutdowns.

Fertitta took out a $200 million dividend from Golden Nugget in January 2020, but later returned $50 million to help the company survive the COVID-19 shutdowns.

Meanwhile, Fertitta’s deal to take Golden Nugget Online Gaming was structured to allow him to keep $150 million of the $745 million paid by Landcadia Holdings II, a blank-check company to acquire it. The rest of the money went toward helping complete Fertitta’s larger refinancing plan.

Fertitta also reportedly thought about cutting the Houston Rocket’s payroll as the lockdowns continued to cancel any ticket sales. It’s estimated that the Rockets are on track to lose $100 million to $120 million if fans are not allowed to return fully this season.

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