LAS VEGAS--(BUSINESS WIRE)--UNITE HERE Gaming Research informs potential investors about several issues concerning the Red Rock Resorts IPO. It will fund a substantial cash payout to the Fertitta family (majority owners of the Ultimate Fighting Championship), who will retain control of the gaming company through 10:1 super voting rights, but the company has growth uncertainties, an unequal tax receivable agreement, and the regulatory problems of Deutsche Bank, a significant owner.
“The Red Rock Resorts offering is a complicated IPO with a simple result: public shareholders will end up with second-class shares despite what we see as significant issues,” said Ken Liu, a UNITE HERE Gaming analyst. “Given the paltry growth in the Las Vegas locals market, investors should question the $460-million price to buy Fertitta Entertainment from insiders and the cash costs of the tax receivable agreement, both of which reduce potential gains for public investors.”
UNITE HERE Gaming is sharing its analysis of the questions associated with the Red Rock IPO at its website, Red Rock Resorts/Station Casinos IPO Dissected, www.RRRIPODissected.org. Red Rock Resorts is acquiring a minority economic interest in Station Casinos LLC, which acquired the assets of Station Casinos Inc. out of Chapter 11 bankruptcy in 2011.
Red Rock’s complex Up-C IPO structure, which preserves certain tax advantages for pre-IPO owners, is (1) front-loaded with a $460-million payout to company insiders that internalizes management at a high cost to investors, (2) includes a tax receivable agreement which could significantly affect the company’s free cash flow (even without changing its EBITDA) as a result of required cash payments to pre-IPO owners for years, and (3) does not disclose the fact that Deutsche Bank’s German American Capital Corporation (GACC), a 25% current owner, is the affiliate of a criminal, which is a significant fact because the company’s casinos are licensees in the stringently regulated Nevada gaming industry.
“Prospective investors should be provided with more details about the regulatory issues surrounding Deutsche Bank and the attendant risks before they invest,” added Liu.
Red Rock Resorts has disclosed that significant shareholders or pre-IPO owners could be required by Nevada gaming regulators to “rapidly liquidate” their ownership stakes. This could negatively affect Red Rock’s Class A share price and, if the company is required to repurchase the equity holdings of such significant owner for cash, it could “materially negatively” affect the company’s liquidity and financial position.
Other findings from UNITE HERE Gaming Research’s on-going analysis of the Red Rock Resorts IPO:
- Red Rock Resorts is selling investors a growth narrative while slot revenue in its key Las Vegas locals market has declined since 2009, and the company’s gaming revenue has seen little growth.
- Its two tribal gaming management agreements are set to expire in 2018 and 2020.
- The $460 million price of the Fertitta Entertainment acquisition is nine times the trailing‐12‐month management fee the firm receives from Station Casinos, while the terms of publicly available management agreements between it and Station Casinos permit termination fees of 1x TTM management fee if properties are sold to third parties.
- Red Rock will also enter into a tax receivable agreement that will require it to make potentially “substantial” cash payments to the Fertitta family and other pre-IPO owners. Red Rock will be required to make these payments before it pays dividends, so they could have a negative impact on the company’s free cash flow even if they won’t have an impact on the company’s EBITDA figures.
- There are substantial conflicts of interest among underwriters, pre-IPO owners, and certain lenders to Red Rock and Fertitta Entertainment. For example, the Fertitta Entertainment deal will pay off $55 million of its outstanding debt under a credit agreement with Bank of America and JP Morgan Chase, whose affiliates are underwriters of the Red Rock IPO.
Station Casinos LLC, which Red Rock Resorts will acquire through the IPO, currently operates 21 casinos, including nine with hotels and ten smaller ones in locations such as taverns and bowling alleys (with three being 50%-owned) in the Las Vegas locals market, plus two tribal casinos in Northern California and Western Michigan.
UNITE HERE represents 275,000 gaming, hotel and food service workers in the U.S. and Canada. UNITE HERE Gaming Research provides insights on the gaming industry from the perspective of those who work in the industry. UNITE HERE’s Culinary Local 226 and Bartenders Local 165 have a labor dispute with Station Casinos.