SPACInsider contributors Anthony Sozzi and Sam Beattie this week compiled their three favorite potential SPAC targets among companies in hospitality. We look at why they are compelling and why each could be a fit for a blank-check merger.
Last week we took a look at the signs that Americans are taking flight once again. There is also plenty of opportunity for SPACs to meet them when they land. Market enthusiasm for hospitality and accommodation companies is currently matching the pent up cabin fever that travelers have, itching to get out and do stuff.
Now could be a unique time for SPACs to offer companies exposure to that market sizzle while also easing debt burdens and allowing for some opportunistic pivots ahead of a full normalization of the post-COVID world.
Hard Rock International
Not many deals have caught immediate retail frenzy in the current SPAC market, but the transactions that stand out are those that have combined with iconic brands making a pivot.
PLBY Group, the brand formerly known as Playboy, hit a high of $59.60 on May 4 three months after completing its combination with Mountain Crest. The former media property now going into consumer lifestyle products has slid since, but has maintained a near-quadrupling of its value, closing Thursday at $39.57.
Historic collectable card company Topps looks like it too will have a happy debut once it closes its merger with Mudrick II (NASDAQ:MUDS), closing Thursday at $12. Headline deals for a stake in Universal Music Group and the Golden Nugget/ Landry’s hospitality group are also trading up with Pershing Square Tontine (NYSE:PSTH) and FAST (NYSE:FST) trading up 15% and 23% from their IPO price, respectively.
Hard Rock could well be in for a splashy debut itself. Hard Rock International has grown from niche tourism destination into a massive hospitality group comprised of 239 locations in 68 countries, including cafes, hotels casinos and live music venues.
The company is staying nimble, and similar to PLBY, is leveraging its brand power to move into hot sectors that have been squarely on SPAC radars. In 2020, it launched Hard Rock Digital, an online sportsbook, retail sportsbook and internet gaming platform. All of that is before mentioning Hard Rock’s museum’s-worth of music memorabilia including about 86,000 pieces behind the glass across its locations.
All of this could make Hard Rock difficult to value, and the group may not have made it out as badly as others in the hospitality space due to many of its locations operating on a franchise model. The Seminole Tribe of Florida acquired Hard Rock in 2006 for $965 million. At that time, it was a network of 124 restaurants and 7,000 employees.
Not only has the business diversified since then, but its headcount is now about six times larger with 50,000 employees on staff. But, even if the business itself is not hard up for cash, the Seminole tribe may be looking to gain some liquidity after holding mostly private casino and hospitality assets in its portfolio through the pandemic.
A SPAC deal could leave it with nearly as much equity in Hard Rock as it wished but also far more able to realize value gains on the business rather than simply banking the take from its bars and tables.
Only six SPACs currently searching for targets raised $1 billion or more in total proceeds with their IPOs – KAHC, ASZ, CVII, IPOF, JWSM, and AAC – which is likely what it would take for a target that has likely multiplied its valuation several times since 2006. Of these SPACs, the best fit could be the largest – KKR I (NYSE:KAHC) – with $1.38 billion in trust and a stated interest in the consumer and retail sectors.
While hospitality sites like Hard Rock’s are in line to get immediate relief from the easing of pandemic restrictions, mountain sports companies still have several months to get through before it’s money-making season for them again.
Powdr operates 11 mountain resorts in the US, Mexico and Canada, with four of these acquired through M&A in the past six years. A SPAC deal now for Powdr could ease some leftover financial pain from the pandemic while giving it dry powder to snatch up a further distressed resort asset or a few.
In addition to be providing an entry point into one of the top four ski resort operators in the US, it is a business that could be sold to ESG investors as it is a supporter of the National Ski Areas Association’s (NSAA) Sustainable Slopes initiative. Several of its ski lifts are powered purely by manure from local dairy farms and its local solar panels provide a further 3.6 million kWh hours of its own power consumption annually.
Powdr also sports strong exposure to the “experience” market, whose growth is outpacing that or general travel. Its existing network sends thrill-seekers on 26,400 helicopter and rafting experiences annually.
As for valuation, Vail Resorts (NYSE:MTN) has roughly triple Powdr’s scale with 37 mountain resorts and it has a current market cap of $13 billion. It trades at 8.3x revenue, but its revenues were also down 67.2% in 2020 due to pandemic impacts. If Powdr is to see a similar market reaction to Vail, it likely won’t be getting cheaper anytime soon.
Vail hit its pandemic nadir at $147.71 in March 2020, but closed yesterday at $324.74 already above its five-year high of $298.05.
Casinos are similarly enjoying public market enthusiasm while their private cousins have been stuck dealing with COVID-19 impacts and rising debt on their own.
Caesars Entertainment (NASDAQ:CZR) just closed at $103.22 – almost double its pre-pandemic high of $68.12. MGM (NYSE:MGM) is on a similar, if less pronounced hot streak at $43.12 about 18% above its pre-pandemic five-year high of $36.45. Both have diversified into online gaming and the market appears to see them as set up to meet the moment.
Affinity Gaming has yet to make the pivot to the internet, but a SPAC deal could potentially fund that transition. Its eight physical casinos are all in secondary gaming markets with one off-strip Las Vegas location, three in Primm Valley, Nevada, another in the northeast Nevada town of Sparks. This is rounded out by two Missouri locations and one in Iowa.
These spots may be less effected by a near-term rush back to traveling, and, in fact, may have been less affected by consumer behavior changes during the pandemic to begin with. But, it appears Affinity felt some impact from the virus as it refinanced $475 million in debt in December 2020 with Goldman Sachs, Macquarie, Deutsche Bank, and Credit Suisse participating in the reset.
Moody’s estimated that Affinity still had a debt-to-EBITDA ratio of 6x to 7x coming out of this restructuring and many of its SPAC-connected financiers have equity cures in the lien terms. A SPAC deal with Affinity could clear the decks for Affinity in a more long-term fashion, giving its lenders an equity exit, funding an online gaming launch and allowing it benefit from the current market enthusiasm for gambling.
One further SPAC connection is that Affinity is backed by Z Capital Group, which is the sponsor of Gaming & Hospitality Acquisition Corp. (NASDAQ:GHAC), which listed in February.