Last week, we wrote to the SEC with questions concerning the audited financial statements of Red Rock Resorts. In our letter, we ask two specific questions:
- Did Fertitta Entertainment, which will be acquired by Red Rock for $460 million, provide audited financial statements with an unqualified opinion by its auditor – also Ernst & Young – after it agreed to be acquired by Red Rock?
- If Fertitta Entertainment did not provide audited financial statements, how did Ernst & Young handle the inclusion of Fertitta Entertainment when it produced the audited consolidated financial statements of the Station Holdco holding company?
Our questions were based on this disclosure from the Fertitta Entertainment purchase agreement:
With respect to [Fertitta Entertainment LLC’s] consolidated financial statements for the years ended December 31, 2012, 2013 and 2014 and for the six months ended June 30, 2015, the Company did not record share-based compensation expense associated with equity incentives issued to current and former executives of the Company from FI Station Investor LLC. FI Station Investor LLC is an entity that is owned by the parent entities of the Company. Pursuant to GAAP, this non-cash share-based compensation is required to be recorded as a component of the Company’s statement of operations since these executives were employees of the Company and FI Station Investor LLC is a common-controlled entity of the Company’s equity holders. The Company’s auditor, Ernst & Young LLP, has determined that each of the foregoing financial statements would require to be restated and has withdrawn its opinions for each audit period that are dated March 25, 2015, May 14, 2014, April 16, 2013 and May 15, 2012, respectively.
This disclosure makes one question how the unnamed financial advisor to the special committee of Red Rock was able to provide a fairness opinion on the Fertitta Entertainment acquisition, if the target company’s auditor had withdrawn its opinion on its financial statements.
It is possible that, since last October, when the purchase agreement was signed and the above disclosure was made, Fertitta Entertainment restated its financial statements for the named periods and Ernst & Young has since audited and provide an unqualified opinion on its restated financial statements. But if that is what has transpired and new financial statements acceptable to the auditors are available now from Fertitta Entertainment, should the $460-million agreement signed last October be revisited to ensure the deal is still fair to Station Casinos and its current and future investors?
See more of our analysis of the Red Rock Resorts/Station Casinos IPO:
- Download our unauthorized roadshow presentation, “Red Rock Resorts: A Second-Class IPO” here.
- The insiders are cashing out at a high price compared to the company’s estimated equity.
- Growth concerns in the company’s primary Las Vegas locals market and the lack of new development agreements in the tribal gaming market.
- The tax receivable agreement could drain substantial amount of cash out of the company and affect free cash flow.
- The dual-class structure will make public investors second-class shareholders.
- The lack of disclosure regarding the regulatory problems of Deutsche Bank, a 25% current owner.