Landcadia Holdings’ (NASDAQ:LCA) agreement to merge with Golden Nugget Online Gaming in June is still of much interest to investors. When its shares merge into GNOG stock, which has yet to happen, markets will know more about sentiment regarding the deal. Investors can view the deal through several different lenses, as with any potential investment. Likewise, future Golden Nugget shares and current Landcadia shares have pros and cons associated therewith.
The deal has tailwinds, including the emergence of online gambling, as more jurisdictions are beginning to allow it. The specific investment type — a special purpose acquisition company, or SPAC — also has been trending after showing success. Further, Golden Nugget Online Gaming itself has shown financial strength of late.
Investors know these factors well, but this investment is by no means a slam dunk.
Case for an LCA Stock Spike Following Reverse Merger
Once LCA shares get wrapped up into GNOG following the consummation of the deal, prices may very well rise further. This will be a continuation of Landcadia’s upward movement, should it occur once everything is consummated.
That said, the stock has not appreciated massively following the June announcement. Shares rose from near $10 to their current prices in the $15 range.
So there is plenty of room left for shares to rise. Investors familiar with SPACs will be aware that they have been popular recently. The LCA/GNOG deal will receive attention because it will also follow that legal format. DraftKings (NASDAQ:DKNG) and Nikola (NASDAQ:NKLA) have utilized the same method to get to market, and Spartan Energy Acquisition (NYSE:SPAQ) has a deal in place with Fisker. Nikola’s troubles aside, SPACs are getting attention.
DraftKings’ price has risen almost 200% since it went public via a SPAC. It also operates in the gambling space, so the similarities are several. Investors may be thinking just as those shares appreciated following the reverse merger, so too may Landcadia’s.
This is precisely what Investorplace’s Mark Hake believes may happen based on his analysis of pro forma statements relevant to the deal. According to his analysis, shares may trade above $30 once they are subsumed under the GNOG ticker.
Internet Gambling Market
Internet gambling itself is an emerging market — one that Golden Nugget recently has done well in. Gross gaming revenues just about doubled in the second quarter 2020 relative to Q2 2019, going from $15.3 million to $28.2 million. In the same period, operating income rose to $8.5 million from $4.9 million.
Golden Nugget will be expanding online gambling operations beyond New Jersey to include Michigan and Pennsylvania. The company intends to initiate operations in those states in early 2021 upon regulatory approval. Investors into LCA shares will be investing into this expansion should they buy shares. LCA will be using the capital raised via this reverse IPO to develop the business outside of New Jersey.
New Jersey is the leader in this market, and Landcadia is hoping it can see similar growth in Michigan and Pennsylvania.
Online Gambling Growth
The pandemic has certainly been a boon for online betting. According to PRNewswire, “The global online gambling market is expected to grow from $58.9 billion in 2019 and to $66.7 billion in 2020 at a growth rate of 13.2%. The growth is mainly attributed to COVID 19, due to which populations are confined to home during the lockdown and have free time to participate in several free and paid leisure activities including online gambling.”
And Landcadia itself claims that it will capture 10% of the $22 billion U.S. iGaming market. (page 21). Golden Nugget has been a leader in this sector without a doubt. Fundamentally and financially, there are absolutely tailwinds making Landcadia worthwhile on a bet.
Yet, it won’t be smooth sailing if previous long-term LCA investors have anything to say about it.
Shareholders Unhappy
There has been much speculation surrounding the legitimacy of the LCA and Golden Nugget SPAC deal. I am not a lawyer, nor do I have particular insight into the contentions of shareholders in this case. However, it bears mentioning that LCA shareholders have filed multiple suits against Landcadia’s management in relation to the GNOG deal. Back in August shareholders also filed a separate suit.
Investors will be aware that this in no way legitimizes any claims against Landcadia. However, it does change the calculus of investing into LCA. I’m by no means an expert in SPAC legislation. Yet, I don’t recall such controversy surrounding DraftKings following its reverse merger.
Takeaway
My gut feeling is that once GNOG becomes finalized, prices are going up. I also get the feeling that previous LCA shareholders likely have legitimate complaints, but that business is business.
Specifically this is the gambling business. And while business isn’t for the faint of heart, I’d imagine the gambling business is even less so. But that probably won’t affect this merger much.
I’m not going to purchase shares, but I can certainly see the logic in choosing to do so.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article.