It’s been almost three months since Landcadia Holdings II (NASDAQ: LCA) announced it was combining with the Golden Nugget’s online gaming business. LCA stock is up 80% since the announcement.
If you’re thinking about backing billionaire Tillman Fertitta’s latest SPAC adventure, you might want to think twice. Here’s why.
I’m a Big Fan of SPACs
I’ve been following this investment vehicle for years. I can remember when hedge fund managers were buying them in 2008 to park their money during the correction. This year, as you’re probably aware, they’ve taken off like weeds. People can’t get enough of them.
As I stated in March, “SPACs have become all about the jockey and less about the horse.”
So, if you’re considering buying LCA stock, more than anything, you’re betting on Tilman Fertitta. Sure, you’re also making a play on online gaming, but as my InvestorPlace colleague Matt McCall recently argued, Landcadia is a bad bet in a winning sector.
“First, this SPAC deal isn’t about taking a high-growth company public. It’s about a billionaire looking to cash in on today’s SPAC gold rush. Why? To save his over-leveraged hospitality empire,” McCall wrote on Sep. 9.
“Second, compared to other online gambling plays, you can call this company an ‘also-ran.’ Other online gambling companies have the size and scale to dominate the market. This player? Not so much.”
I don’t think there’s any question that if you believe in online gaming, you ought to look elsewhere. I’m particularly attracted to DraftKings’ (NASDAQ: DKNG) growth potential, but there are plenty of other options to consider. Just go down the list of holdings for the Roundhill Sports Betting & iGaming ETF (NYSEARCA: BETZ) and you’ll get plenty of ideas.
As I said, SPACs are an exciting vehicle because it allows the average investor to invest with some of the industry’s biggest successes.
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).
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.
Of all the horses to bet on, Fertitta might not be the one whose house is in the best shape. His debt situation alone suggests a lot has to go right for him not to lose some of his toys in the coming months.
With the novel coronavirus sticking around into 2021, his businesses are right in the crosshairs. That’s not a good place to be.
LCA Stock Has a Precedent
Tilman Fertitta’s first SPAC was Landcadia Holdings in May 2016. The SPAC raised $250 million to find a merger candidate within 24 months. It found a candidate in Waitr Holdings (NASDAQ: WTRH), completing the combination on Nov. 15, 2018.
“We are pleased to complete the merger with Waitr. I believe they are the best-in-class, on-demand food ordering and delivery partner for customers and restaurants. They are also positioned well to take advantage of the massive unpenetrated market for online delivery, particularly in secondary markets,” Fertitta stated in the 2018 press release announcing the completion of the merger.
The stock got as high as $14.77 in March 2019. However, it’s now trading around $3.40, 66% below the SPACs issue price in May 2016. Before you plunk down money on LCA stock, you might want to consider that Fertitta’s track record isn’t all that it’s cracked up to be.
Waitr’s revenues have grown significantly in the past year compared to sales in 2018; it is still losing a lot of money. Its operating loss in 2019 was $281.3 million on $191.7 million in revenue. In the first six months of 2020, thanks to a lot of cost-cutting, it’s managed to generate an operating profit of $14.6 million versus a loss of $46.5 million a year earlier.
While it appears Waitr has turned a corner, its stock’s recovery in 2020 seems to have come to an end as we approach the final quarter of the year. Since the middle of August, it’s lost one-third of its value.
It’s got a long way to go to get back to break-even. I don’t see it doing so until it books a couple more quarters of profitable growth.
Like my colleague, I believe that Fertitta is using LCA to get himself out of a hole.
Don’t be the one to help him.
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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