Last month, Golden Nugget Online Gaming announced it would be coming to the public markets through a merger with special-purpose acquisition company (SPAC) Landcadia Holdings II (LCA). Shares of Landcadia spiked after the announcement as investors cheered the opportunity to gain exposure to the fast-growing online gambling market.
Going public via a SPAC
Golden Nugget Online Gaming isn't going public through a traditional IPO process. Instead, an already-public special-purpose acquisition company (SPAC) will be bringing it public through acquisition. SPAC IPOs are not new, but they have risen in prominence in recent years as an attractive way for private companies to go public faster.
In this case, Landcadia Holdings II, a SPAC managed by billionaire businessman Tilman Fertitta, is acquiring Golden Nugget Online Casino for $745 million. The deal still needs to be approved by Landcadia's shareholders and by regulators before it can close; however, Landcadia is already a public company, which means investors can buy the stock in anticipation of the deal closing to gain exposure.
The deal is expected to close in the third calendar quarter of 2020, and when it does, the trading symbol will change to "GNOG" from "LCA."
Growth in online gambling
Investors are excited over the Golden Nugget Online Gaming IPO because the company is a way to play the fast-growing online gambling industry.
There is a lot of hype around the potential size of the online gambling market in the U.S. as states have started to legalize sports gambling. Golden Nugget Online Gaming focuses on iGaming, or online casino gambling, which consists of online slot machines and online card games such as poker. Although not as many states have legalized online casino gambling, a few -- including New Jersey, Pennsylvania, and Michigan -- have.
Golden Nugget Online Gaming is already a leader in the New Jersey iGaming market. It was the first online casino to set up shop in 2013. Today, the company has captured over 10% market share in New Jersey and has plans to expand into other states starting with Michigan and Pennsylvania.
The company is already EBITDA-positive and grew its sales at 48% per year between 2016 and 2019. In 2019, it generated $55.4 million in revenue and $16.7 million in EBITDA. The company believes it can continue its rapid pace of growth in the coming years.
Despite the enticing growth story, there is a sticking point with the deal that investors should be aware of. Tilman Fertitta, the manager of the Lancadia SPAC, is also the owner of the Golden Nugget Casino, which is selling the online casino to the SPAC. In other words, Fertitta is on both sides of the transaction as a seller and a buyer, which technically makes the acquisition a related-party transaction.
Fertitta's involvement as both a buyer and a seller should be carefully scrutinized by investors as it constitutes a conflict of interest in some regards. Golden Nugget Casino is wholly owned by Landry's, a holding company owned by Fertitta; however, Fertitta doesn't own a majority of Landcadia shares. Therefore, Fertitta is a net seller of the online casino and has some influence over the buyer.
The next DraftKings?
Golden Nugget Online Gaming is poised to be a strong growth stock in the coming years, and is worth paying attention to. Other online gambling stocks including DraftKings (DKNG -3.95%) are sporting high valuation multiples, indicating investor enthusiasm.
Golden Nugget Online Gaming already has a leading position in online casino gambling in New Jersey. If it can translate that lead to other states, the business will likely experience high growth and see its stock soar. However, this level of operational execution is no sure bet, and investors should be mindful of the risk that the company could fall short.