Wednesday, June 13, 2018

A Tale of a Strip Club Roll Up

A Tale of a Stripper Club Roll Up: Super Bowl party deals, private jets, conflicted board members, retail investor hype, CEO arrest, loans to relatives, partnerships with criminals, divorce disclosures, declining base biz & 50%+ downside: https://bitly.com/2JsWCNC



After nearly 10 years of following RCI Hospitality, I've compiled my notes into a report. A lot of time and effort went into the report, so I hope you enjoy reading it. In the coming weeks I will continue to post a number of issues that didn't make it into the report as well as expand on some of the topics that were briefly mentioned in the report. Full report: https://bitly.com/2JsWCNC


RCI Hospitality (RICK): Overvalued Roll Up with Hidden Related Party Transactions, Conflicts of Interest, SEC Violations, and 50%+ Downside


Executive Summary: Retail investors enamored with RCI’s new capital allocation strategy have driven shares up over 300% to extremely overvalued levels and shares now trade at more than double their historic multiples. RCI’s roll up strategy uses new acquisitions to hide the fact that its base business is declining. Analysis of actual results from all 45 announced transactions since 2005 shows the average multiple paid is ~8x EBITDA, not the 3-4x that management claims. In addition, newly discovered related party transactions, SEC violations, conflicts of interest, and hidden purchases call into question the leadership of management and the board. Shares would need to fall more than 50% to trade in-line with historic multiples, even before a discount for mismanagement and poor stewardship.

Numerous governance red flags have been uncovered, including management’s use of the company as a personal piggy bank: RCI has been known for poor corporate governance due to its fleet of corporate jets and excessive car allowances, but numerous new egregious actions have been uncovered, including:
·       RCI made loans to its CEO that were not disclosed in SEC filings.
·       CEO funneled RCI corporate business to a lawyer that he was personally indebted to.
·       One of RCI’s Independent Directors is the brother of a senior executive, a violation of SEC requirements for independent director.
·       One of RCI’s Independent Directors frequently takes on legal work for RCI, but RCI has never disclosed the related party transaction.
·       CEO was arrested for domestic assault.
·       CEO’s relative defaulted on a loan received from RCI.
·       RCI’s failed Los Angeles club was partnered with a convicted criminal who had partied with RCI’s CEO at the Super Bowl & Mardi Gras in months ahead of the formation of the JV.  RCI’s partner was already behind on rent before RCI joined the JV & the club was shut down within a year of opening.
·       RCI inexplicably owns 3 residential houses in Houston
·       RCI sent donations to CEO’s children’s private school through a shell company.
·       RCI owned (and may still own) a 338-acre ranch in Texas.
·       RCI Board allowed the CEO’s employment contract to lapse until his divorce was finalized.

Business Analysis: RCI’s roll up strategy masks its declining base business, and actual acquisition multiples are double management’s claims.
·       Valuation – Shares are worth $13-17 and have 50%+ downside. The stock is currently trading at more than double its long-term historic average on a P/S, P/E, & P/B ratio.
·       M&A Strategy – A detailed analysis of all transactions since 2005 shows that RCI’s pretax return on investment is less than 13%, no where near the 25-33% that management claims.
·       Bombshells –Management has previously attempted 10 non-strip club ventures. All have ended in failure. After 3 years Bombshells has yet to land a single franchisee, Head of Franchising left after one year, & food sales are already declining.
·       History Repeats – Last time RCI drew this much retail attention the shares crashed from $28 to less than $4 within a year.



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