There has been an increased focus on the corporate governance structures that boards implement leading up to an IPO. We have criticized the corporate governance of Red Rock Resorts, Inc. since its IPO was announced last October (and when it was still called Station Casinos, Inc.).
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The $460-million Fertitta Entertainment internalization fee is much higher compared to historical REIT internalization fee figures from a Sept. 2014 Duff & Phelps study. Some REITs have internalized external managers with no fee. The non-insider cost for acquiring Fertitta Entertainment should be closer to $50 million, not $460 million, based on termination provisions in the casino management agreements
On January 28, the same Fidelity fund filed a new quarterly report and presented the values of its holdings as of November 30. The value of its Station Casinos stake dropped by over 5%. The implied valuation of Station Casinos would have thus dropped to $1.06 billion at the end of November.
Deutsche Bank announced last Thursday that the Station Casinos (Red Rock Resorts) IPO had been postponed. Will the Fertitta family and other insiders seek other ways to fund the $460-million Fertitta Entertainment deal even before the IPO goes to market? Will the terms of the IPO be modified?
There was a surprise in the company’s third quarter financial statements with respect to cash distributions to members: Station Casinos’ third-quarter cash payouts to its owners was were approximately 118% of its EBITDA.
The IPO’s tax receivable agreement requires Red Rock to pay out a substantial (and potentially unlimited) amount of cash to the pre-IPO owners for years after the IPO. TRA payments will not be subject to the approval of outside investors, can negatively affect free cash flow (not EBITDA) and Class A stockholders’ equity, and will be in addition to quarterly tax distributions payable to the pre-IPO owners.
According to Red Rock Resorts, Inc.’s Jan. 14, 2016, S-1/A filing, “an airplane will be transferred by Fertitta Entertainment to one or more of its members or their affiliates prior to the consummation of the Fertitta Entertainment Acquisition.” No further details about this transfer are disclosed in the company’s IPO filings.
Corporate governance in an IPO reflects the value current owners place on investment from outside investors. Red Rock’s current owners have chosen second-class status for new public investors in their company. Will you choose to be a second-class shareholder?
As one gaming analyst recently said about the Red Rock Resorts IPO, “there is going to be an appetite for them to grow.” However, economic conditions in Las Vegas and little revenue growth by Red Rock suggest hungry investors might not find the company very appetizing, especially as they see company insiders planning to take out a substantial amount of cash concurrent with the IPO.
As currently proposed, the Red Rock Resorts IPO will result in the Fertitta family taking substantial sums from the company, retaining control for the long term through super voting rights, and shifting risks in its current structure to new public investors. The complicated IPO thus presents prospective investors with an unappealing proposition.