Leo Holdings Corp. (LHC), announced this morning that they have entered into a definitive business combination agreement with CEC Entertainment, Inc. (“CEC”), the owner, operator, and franchisor of the Chuck E. Cheese and Peter Piper Pizza brands. Queso Holdings, Inc. (“Queso”), is the parent company of CEC, together with Queso’s controlling stockholder, an entity owned by funds managed by affiliates of Apollo Global Management, LLC (NYSE: APO).

Immediately following the closing of the proposed transaction, LHC intends to change its name to Chuck E. Cheese Brands Inc. The current CEC executive management team will continue to lead the Company, which will trade on the New York Stock Exchange under ticker symbol CEC. This transaction has an anticipated initial enterprise value of approximately $1.4 billion or 7.5x the Company’s estimated 2019 Adjusted EBITDA of approximately $187 million. The Apollo funds will not be selling any shares in the transaction and will continue to be CEC’s largest shareholder with approximately 51% ownership of the Company post-closing.

As background, Apollo Global management bought Chuck E. Cheese’s parent company in 2014 in a take-private transaction valued at $948 million.  However, as a sign of current confidence, Apollo will not be selling any of it’s shares in the combination transaction.  Furthermore, CEC’s executive team has significant experience and appear to be fully executing on a revitalization of the brand.  To wit, CEC is currently anticipating Q1 same-store-sales to rise to 7.7% compared to 3.3% in the fourth quarter and much of that growth can be attributed to an enhanced in-store experience. Additionally, 32 remodels have already been completed to-date and another 60 are expected to be completed in 2019.

THE TRANSACTION

CONSIDERATION

Equityholders of Queso will receive:

• 36,000,137 shares of common stock
• The right to receive up to an additional 4 million shares of New Leo Common Stock upon the occurrence of certain events (see “Earnout” below)

Cash held in the trust account net of redemptions and the gross proceeds of the Private Placement (the “Cash Proceeds”) less the transaction costs of the Business Combination will be used to pay down certain indebtedness of Queso at the closing of the transaction.

EARNOUT

Queso will also have the right to receive up to 4,000,000 additional shares of common stock if:

• 2021 Share Price Target:  2,000,000 shares if the closing sale price of Leo Common Stock equals or exceeds $13.00 per share (as adjusted for stock splits, stock dividends, reorganizations and recapitalizations) for any twenty (20) Trading Days within any thirty (30) consecutive Trading Day period ending on or prior to December 31, 2021.
• 2022 Share Price Target:  2,000,000 shares if the closing sale price of Leo Common Stock equals or exceeds $14.00 per share (as adjusted for stock splits, stock dividends, reorganizations and recapitalizations) for any twenty (20) Trading Days within any thirty (30) consecutive Trading Day period ending on or prior to December 31, 2022.

If a sale transaction of the combined company occurs in which the consideration paid per share to holders of common stock of the combined company exceeds $13.00 per share or $14.00 per share for either 2021 or 2022, respectively, the Company shall issue the Earnout Shares.

PIPE

• Investors, including funds managed by Lion Capital LLP

10,700,000 shares of Leo’s common stock for an aggregate of up to $100.0 million. As a result of the Sponsor surrendering 1,750,000 shares to Leo upon closing, the net effect is that the Private Placement is not dilutive to a $10 per share valuation of Leo.

FORFEITURE of Founders Shares and Warrants

The sponsors will forfeit:

• 1,750,000 Sponsor Shares and

For reference: At IPO, LHC’s sponsors owned:

• 5,000,000 Sponsor shares and
• 4,000,000 Sponsor warrants

CONDITIONS TO CLOSING

• The aggregate amount of the Cash Proceeds is no less than $250 million.

ADVISORS

• Citigroup Global Markets Inc. acted as financial advisor, capital markets advisor and private placement agent to Leo.
• Jefferies LLC acted as financial advisor and capital markets advisor to CEC.
• Kirkland & Ellis LLP acted as legal counsel to Leo.
• Morgan, Lewis & Bockius LLP acted as legal counsel to CEC.