April 26, 2016 - 10:44 am
The saying goes that the house always wins. In Red Rock Resorts’ upcoming initial public offering, the Fertitta brothers certainly stand to come out on top.
Frank, 54, and Lorenzo, 47, Fertitta are CEO and director, respectively, of Las Vegas-based Red Rock, a casino operator scheduled to price its IPO today. At the high end of its marketed range, Red Rock could raise $572.25 million, making it the largest IPO so far this year, according to data compiled by Bloomberg that excludes real estate investment trusts, special purpose companies, and closed-end and country funds.
The brothers stand to get several jackpots out of the deal: proceeds from the sale of their casino management unit, annual payments linked to the tax benefits of becoming a public company and a huge chunk of voting rights once shares are sold. They’ll also get the standard IPO proceeds from selling their own shares.
Red Rock is pitching the brothers’ control over the company as a plus for investors, according to its roadshow presentation.
“We’re significantly committed,” Frank Fertitta said in the presentation. “This is a big part of our family’s wealth and investment, and we think it will be a good partnership between us and the public shareholders going forward.”
Not everyone agrees, however.
“It’s not ideal, that structure,” said Kathleen Smith, principal at Renaissance Capital, which manages IPO-focused exchange-traded funds. “It’s not that we don’t like the family, the issue is with the distributions and that they have so much control.”
Representatives for Deutsche Bank, which is leading the IPO, and Red Rock declined comment on the IPO.
The biggest windfall — about $335 million — will come from the Fertittas’ casino-management unit. As part of the IPO, Red Rock will buy Fertitta Entertainment for $460 million minus debt, according to the offering documents. The brothers will each receive $113.5 million from the sale, while trusts for the benefit of their six children will receive a combined $106.8 million.
That’s a hefty premium to the valuation given in a management contract filed with regulators in February. According to the filing, if Fertitta Entertainment were to be sold its value would equal management fees — about $53 million last year, according to the IPO prospectus.
The brothers expect to be the sole owners of new super-voting shares in the company after the IPO, giving them 87 percent of the voting power, assuming the minimum anticipated number of shares are sold. New shareholders will buy into Class A shares with combined voting power of just 7.3 percent.
Investors aren’t just betting on the Fertitta brothers’ management, they’re also gambling on the health of the Las Vegas gaming market. Central to Red Rock’s growth strategy, as laid out in the IPO prospectus, is belief that “our existing Las Vegas portfolio should benefit from improving economic conditions.”
The Fertittas know firsthand the pitfalls of depending on that market.
In 2007, the brothers took the company, then called Station Casinos, private in a $9.1 billion leveraged buyout, months before the casinos business was hit by the financial crisis and housing market collapse. Station filed for bankruptcy in July 2009.
That could have been the end of the story. Instead the pair, who also own the Ultimate Fighting Championship mixed martial arts league, fought off a hostile offer in bankruptcy court from Boyd Gaming Corp. They pumped about $250 million of their own money into the company, and emerged in 2011 with a stake twice the size of the one they had before the buyout, Frank Fertitta said during the roadshow presentation.
Deutsche Bank advised the bidders and provided debt financing when Station Casinos was taken private. Through the bankruptcy process, Deutsche Bank ended up with a 24 percent stake in what’s now Red Rock Resorts. It plans to sell some of it when the casino company goes public.
The Las Vegas economy is stronger now, with retail sales, employment and real estate growth in recent months.
Still, Las Vegas’ continued prosperity features high on the list of potential risk factors for Red Rock.
“We depend on the Las Vegas locals and repeat visitor markets as our key markets, which subjects us to greater risks than a gaming company with more diverse operations,” the company said in the prospectus.
Red Rock was founded by the Fertittas’ father, Frank, a former blackjack dealer who opened The Casino just off the Strip in 1976. It was among the first to cater specifically to Las Vegas locals, rather than to tourists. The company now owns or manages 21 casinos in three states. Last year it had net income of $143 million on net revenue of $1.35 billion, according to the filing.
On top of the proceeds of the sale, owners of the company could also receive substantial payments from Red Rock going forward. Converting their shares from a limited liability corporation to a traditional corporation comes with tax benefits, of which they’ll keep up to 85 percent.
If the underwriters of the Red Rock IPO chose to buy all the shares on offer to them, those payments could total as much as $59 million for the Fertittas and their partners, according to the offering statement.
“If they can pull off a deal like this, that just re-emphasizes the fact that Vegas has come back,” said William Thompson, a professor emeritus of government at UNLV who studies the casino industry.