OVERVIEW
Ticker: LNY
Recommendation: Short (or buy puts)
Landry's Restaurants ("Lion") is currently under agreement to be bought out by majority shareholder and Chairman, President, and CEO, Tilman Fertitta ("Toucan") for $14.75 per share by May 31, 2010. Given that Lion is trading at $25.00 (intraday), the market is offering up a price that Toucan will raise his bid.
The acquisition agreement requires a majority of the minority (outstanding, not voted) to approve. Bill Ackman, with Richard McGuire has built up a 24.8% position at a weighted-average cost of $14.76 for Ackman, right above the offer price.
Significant legal issues have come out relating to the special committee's handling of the sale process and inability to get Fertitta under a standstill agreement. http://dealbook.blogs.nytimes.com/2009/12/18/more-mischief-emerges-in-the-landrys-buyout/
Insiders have found the recent above-bid prices as an opportunity to unload shares:
|
|
|
Shares Sold
|
Price
|
Shares Held
|
% of Holdings
|
|
Date
|
Position
|
(#)
|
($)
|
Prior to Sale
|
Sold
|
|
|
|
|
|
|
|
|
11/11/09
|
CFO
|
31,609
|
$15.46
|
6,534
|
82.9%
|
|
11/11/09
|
CFO
|
534
|
$15.35
|
6,000
|
8.2%
|
|
11/11/09
|
General Counsel
|
4,000
|
$15.09
|
8,000
|
33.3%
|
|
11/10/09
|
Sr. VP of Development
|
1,067
|
$15.38
|
1,714
|
38.4%
|
|
11/10/09
|
Director
|
3,000
|
$15.43
|
1,000
|
75.0%
|
|
11/17/09
|
Sr. VP of Development
|
1,400
|
$18.90
|
1,714
|
45.0%
|
|
11/24/09
|
Chief Administrative Officer
|
5,000
|
$21.16
|
7,856
|
38.9%
|
|
12/01/09
|
Chief Administrative Officer
|
6,143
|
$21.04
|
1,713
|
78.2%
|
|
12/02/09
|
General Counsel
|
7,000
|
$21.23
|
8,000
|
46.7%
|
|
12/03/09
|
General Counsel
|
3,466
|
$21.11
|
8,000
|
30.2%
|
|
12/04/09
|
General Counsel
|
20,000
|
$20.69
|
8,000
|
71.4%
|
|
12/07/09
|
General Counsel
|
8,000
|
$20.67
|
8,000
|
50.0%
|
|
12/08/09
|
General Counsel
|
11,534
|
$20.73
|
8,000
|
59.0%
|
Note: A number of sales were the result of the immeidate exercise and sale of options. That is how the GC is routinely selling 33%+ of his holdings.
THESIS
Ackman's de facto blocking position and cost basis have given the market hope that direct negotiations between Toucan and Ackman will result in a higher revised offer. There are three outcomes here:
(1) Fertitta fails - drops his bid, use of the specific financing condition, etc.
(2) Fertitta raises his bid blind - Fertitta revises the offer to a higher prices without negotiating with Ackman and hopes that it works out for the best
(3) Fertitta raises his bid after getting Ackman's consent on a revised offer.
I think if you read the timeline below, you can form your own assessment of the odds of each scenario occurring and find a current $25+ market price is excessive on a probabilistic basis.
Looking at some of the offers on puts seems to indicate that, despite the $24.55 market price, others may be thinking similarly. The May10 $25.00 puts are being offered at $4.60 while the Jun10 and Jul10 $25.00 puts are being offered at $2.90 and $3.00, respectively.
TIMELINE
July 2007 - LNY Lion goes noncompliant on its $400mm unsecured notes and $97mm in bank debt since it cant' file its annual report because of an internal review of stock option grants and its looking to refinance. Toucan told the Houston Chronicle that, "It's no big deal. I can solve it tomorrow by writing a check, but I'm negotiating. Nothing is wrong with the company."
August 27, 2007 - Toucan holds 34.6% of Lion
August 2007 - Certain bondholders tried to accelerate the senior notes. Lion sues and gets a TRO to stay the acceleration. Lion ultimately gets an 18 month forbearance for an interest rate bump from 7.5% to 9.5%.
January 2008 - Toucan makes a bid at $23.50 per share for Lion, a 41 percent premium over the previous close, without having financing lined up but is "confident that he can obtain all the required financing to fund the transaction."
March 2008 - Lion is sued by J.H. Whitney Capital partners for misrepresenting financials of Joe's Crab Shack when J.H. Whitney bought the chain for $192mm in October 2006. for Lion is party to a number of shareholder suits seeking class action status in light of Toucan's bid for Lion, which is alleged to be "unfairly and grossly inadequate, as the intrinsic value of [Lion] is materially in excess of the amount offered." Lion's general counsel says that, "Absent [Toucan's] offer, the likelihood is that [Lion's] stock would be trading well below the current market price.
April 2008 - Toucan lowers his bid to $21 per share because of "tighter credit markets."
June 2008 - Lion accepts Toucan's $21 per share offer
July 17, 2008 - Toucan takes advantage of the lower bid and now holds 39% of Lion (apparently Lion did not get a standstill with Toucan)
October 2008 - Toucan lowers his bid again to $13.50 per share.
January 2, 2009 - Toucan takes advantage of the even lower bid and now holds 56.7% of Lion (Lion still doesn't have a standstill with Toucan).
January 2009 - Lion terminates the proposed deal with Toucan. Lion claims the SEC demanded "unusual" disclosures relating to the commitment letter from lead lenders on the buyout. The company was negotiating with those same lenders to refinance the existing debt it committed to refinance in August 2007. Lion chose to terminate the proposed buyout to preserve the required confidentiality of the buyout commitment to avoid risking blowing up negotiations on the refinancing of the existing debt. Since Lion terminated the transaction, Lion is not entitled to the specifically negotiated $15mm reverse breakup fee which was negotiated down from the originally fee of $24mm.
August 14, 2009 - Lion's board of directors appointed a special committee comprised solely of independent directors of Lion and authorized the special committee to review strategic alternative for Lion, including a possible sale of Lion.
September 9, 2009 - Lion's special committee retained independent legal counsel and engaged Moelis as its financial advisor. Lion issues a press release stating that the special committee was formed on August 14, that the special committee received a letter from Toucan on a buyout with a tax-free spinoff of its Saltgrass Steak House ("Sabre") subsidiary. Toucan discloses that he now holds 57.5% of Lion.
September 15, 2009 - Toucan's new new offer is for $15.61 per share with Sabre spinoff, assuming (i) approximately $30mm standalone EBITDA and $10 standalone net income; (ii) a 15.5x 2010E P/E trading multiple and (iii) $92mm of funded Sabre debt. Lion's special committee says the valuation assumptions value the offer below the $15.61 stated offer price. The special committee formally rejected the initial proposal and offered Toucan the opportunity to submit a revised proposal to October 21.
October 22, 2009 - Toucan submitted a revised proposal as an alternative to the Sabre spinoff of $13.00 per share in cash.
October 23, 2009 - Special committee received a "highly confident" letter from Jefferies for up to $600 million of debt financing in connection with Toucan's revised proposal, subject to market, diligence and approval conditions.
October 27, 2009 - Moelis presents Toucan and his advisors preliminary valuation views highlighting an appropriate valuation would be above the $13.00 revised proposal.
October 28, 2009 - Special committee formally rejects Toucan's proposal upon reviewing the revised draft valuation materials. Toucan ultimately submits a best and final offer of $14.75 per share in cash. Moelis shopped the company to 70 potential buyers: 16 strategic; 54 financial; 28 CAs were delivered: 13 CAs signed and CIMs delivered. IOIs were due in mid-November.
November 3, 2009 - Lion accepts the offer. http://www.sec.gov/Archives/edgar/data/908652/000129993309004375/exhibit1.htm Notably, Toucan agreed to a "Majority of the Minority Vote" provision. See Section 7.03(c). The oustside date for termination is May 31, 2010.
November 12, 2009 - Pershing Square files a 13D with former partner Richard McGuire. McGuire's purchases go back to October 2, 2009 and end on November 3, 2009. Ackman's purchases start on November 3, 2009 and end on November 13, 2009. Ackman's weighted-average cost is $14.54 and McGuire's is $11.33. Including Ackman's total return swaps, total economic exposure is 23.7% (23.4% for Ackman).
November 20, 2009 - Pershing Square discloses additional swaps for another 1.1% of shares outstanding. These have reference prices of $19.37 per share but only move his weighted average cost up to $14.76 per share, optically above the $14.75 that Toucan has offered.
March 11, 2010 - Lion reported fourth quarter results. Aadjusted EBITDA for 2009 was $178.6 million as compared to $191.8 million for the same period in the prior year. The restaurant and hospitality division contributed $136.1 million compared to $129.8 million in the prior year, while gaming operations contributed $42.5 million in 2009 versus $62.0 million for 2008. http://www.sec.gov/Archives/edgar/data/908652/000119312510055343/dex991.htm
April 19, 2010 - Lion announces that it will buy Oceanaire, an upscale seafood chain, out of bankruptcy for $6.6mm in cash and $17mm in assumed debt.