Red Rock IPO To Significantly Benefit Fertitta Brothers

The Initial Public Offering (IPO) for casino operator Red Rock Resorts Inc is scheduled to take place this week after its expected price range was set earlier this month.The proposed structure of the IPO is likely result in significant benefits for the owners, Frank and Lorenzo Fertitta, who are often referred to as the Fertitta brothers.

According to analysts, if the offering reaches the high end of the set price limit, it could become the largest non-REIT transaction of the year netting about $572 million. The Fertitta brothers are slated to gain in multiple ways. They will receive the sale proceeds of a casino management unit, payments arising from tax benefits from becoming a public company and finally and also receive a substantial portion of the voting rights.

Some analysts have raised concerns at the proposed arrangement. In a statement, Kathleen Smith, principal at Renaissance Capital Ltd said,

It’s not ideal, that structure. It’s not that we don’t like the family, the issue is with the distributions and that they have so much control

The deal involving the casino management company alone will give the brothers about $335 million. Red Rock as a part of the IPO will buy Fertitta Entertainment, which currentlyoperates the company’s casinos under an arrangement for $460 million excluding debt. While the brothers will receive $113.5 million each for their shares in the company, while $106.8 million will be set aside for their six children in a trust.

The deal price for Fertitta Entertainment is many times its valuation based on its management fees. According to filings with regulators, the management company reported total fees of $53 million in 2015.

Furthermore, a successful IPO will result in the brothers receiving 87 percent of the voting power and make them sole owners of the newly issued super-voting shares in the company.

Shareholders of the Class A shares issued in the IPO will receive only 7.3 percent of the voting power.

Nonetheless, analysts expect the IPO to generate interest as a result of the revival in Nevada’s gambling industry. After its continued slump for the past five years triggered by the recession, the market has recently seen growth in retail sales, real estate values and employment opportunities.

The company has acknowledged its dependence on the market’s health for its performance, stating in its prospectus that its performance depends on spends by Las Vegas locals and repeat visitors as it lacks the diverse operations of other gaming operators. The Fertitta brothers are also likely to gain from tax benefits due to the conversion of their shares in a limited liability corporation to those in a listed public company.