It's good to be a Fertitta. Not only is the UFC believed to be coming off a record year in terms of revenue, but co-owners Frank and Lorenzo Fertitta are about to take their other majority-owned enterprise public.
On Oct. 13, Red Rock Resorts, Inc. filed a form S-1 for registration of securities with the SEC to officially begin the process of taking the casino company through an initial public offering (IPO). Part of this process included changing the company name from the better-known, but less glamorous, "Station Casinos Corp."
According to an amended S-1 filed last Thursday, the money generated from the offering won't be used for sales and marketing, R&D, capital expenditures, working capital, or to pay off debt. Instead, all net proceeds will go towards reorganizing the corporate structure, including an acquisition of Fertitta Entertainment LLC. It's expected that Frank and Lorenzo Fertitta will each take home $112.5 million while trusts for their six children will receive $53 million. Additional stock sales included in the IPO could net the brothers even more.
In an effort to retain control of the company, Red Rock Resorts will have Class A and B shares, with certain Class B shares having ten votes each. The Fertitta brothers will hold a "substantial majority" of the ten-vote Class B stock. According to the amended S-1, "As a result, the Fertitta family will be able to control any action requiring the general approval of our stockholders, including the election of our board of directors, the adoption of amendments to our certificate of incorporation and bylaws and the approval of any merger or sale of substantially all of our assets. Accordingly, we will be a ‘controlled company.'"
The massive payout comes from a consolidation of the current organizational structure which is a web of entities including Red Rock Resorts, Inc., Fertitta Entertainment LLC, Station Casinos LLC, Station Holdco LLC, and Station Voteco LLC (brave readers can try to follow the org chart below). Most of the executive officers of Station/Red Rock are employees of Fertitta Entertainment which manages the business under terms of a 25-year contract including base management fees of 2% of gross revenues and incentive management fees of 5% of positive EBITDA. In 2014, Fertitta Entertainment's management fees totaled $48.9 million.
As part of the IPO, Fertitta Entertainment will be acquired by Station Casinos LLC with the acquisition funded by IPO proceeds and debt. The Fertittas will receive new employment agreements with Frank, as CEO, earning a base salary of $1 million, a performance-based annual bonus targeted at 100% of base salary, and continuation of his health and life insurance coverage which in 2015 were worth $66,622 and $216,890, respectively. Lorenzo will receive a new employment agreement with a base salary of $500,000.
It's somewhat unusual for all proceeds of an IPO to go towards corporate reorganization and cash events for key owners. Throw in that the Fertittas are taking a page from Google's playbook to retain control of the company and the situation gets rarer still.
While the Fertittas are free to structure the IPO this way, it's investors who will ultimately need to be convinced. Frank Fertitta has likely already begun meeting with potential investors such as mutual funds and hedge funds to gauge their interest. Once the SEC approves Red Rock's paperwork, the last major step before the IPO date is the road show where Frank Fertitta and key personnel will quite possibly travel the world in an attempt to woo big investors.
As for theories this offering will reduce political opposition to legalized MMA in New York, well, the Fertittas will still be controlling owners of the post-IPO enterprise and all of their casino properties still won't be subject to any collective bargaining agreement, so it would seem unlikely. Is this IPO a precursor to a sale of the UFC? According to Forbes, the UFC says it's "not for sale."
Red Rock Resorts will be listed on the NASDAQ stock exchange with the ticker symbol "RRR."
Paul is Bloody Elbow's analytics and business writer. Follow him @MMAanalytics.