Tuesday, February 16, 2010

That's hot! Ricks Cabaret and VCG to merge, after VCG founder's attempted take-under (RICK, VCGH)

Good work by VCG's board, working to defend stockholder value against a belligerent CEO trying to take the company private at an undervalued price. VCG Holdings and Rick's Cabaret will merge, to become the country's largest publicly traded US nudie club. And the price looks like it will be significantly higher than the previous offer from the company's CEO.

The nature of Rick's business might explain why a paltry TWENTY EIGHT - you read that right - institutions own shares of the company. Amazing how people shy away from the adult business while they're happy owning tobacco firms and investment banks...

Back in December I commented on VCG CEO Troy Lowrie's attempt to swipe the company for $2.10 per share. I said that if this CEO could simply shut his trap and get out of the way, the company's "bad CEO discount" might disappear, sending shares up:

What's unfortunate in this situation is the "discount" applied to this business due to Mr. Lowrie's involvement. Looking at their third quarter release, this company is seriously profitable, to the tune of $10million in EBITDA this year and maybe $5-6million in Free Cash Flow
Not mentioned there is the BIG debt load, of approximately $22million. VCG Holdings' EBITDA (Earning before interest, taxes, depreciation & amortization. Basically the money available to cover interest payments.) of about $2.4million covers the quarterly interest payments of $800k, but not by a huge margin. That said, their robust earnings could be used to pay down debt and increase Free Cash Flow. If Mr. Lowrie would simply get the hell out of the way, the "discount" in the stock price due to his meddling might disappear.

VCG's board turned down Lowrie's offer, and today accepted a merger agreement with Rick's Cabaret that looks to be a stock-exchange merger valuing VCGH shares between $2.20 and $3.80 per share, depending on an undisclosed exchange ratio of RICK shares. Hopefully RICK shares will perform well, delivering good value for VCGH shareholders.

Under the non-binding (except as to certain provisions, including exclusivity and confidentiality) letter of intent, the companies anticipate a potential merger (structured to qualify as a tax-free reorganization), in which VCG Holding's shareholders will receive shares of Rick's common stock based on certain exchange ratios valuing each share of VCG Holding's common stock between $2.20 and $3.80 per share, determined based on the weighted average closing price of Rick's common stock as traded on the Nasdaq Global Market for the 20 consecutive trading days ending on the second trading day prior to the closing of the Merger. As of February 16, 2010 (and assuming the potential merger were to close on such date and that the weighted average closing price per share of Rick's common stock for the 20 consecutive trading days ending on February 11, 2010 was equal to the closing price of Rick's common stock on February 11, 2010 of $11.76 per share), the value of each share of VCG Holding's common stock under this formula would be $2.66 per share. In the event the price per share of Rick's common stock as determined by this formula is below $8.00, Rick's may terminate the merger agreement, subject to the payment to VCG Holding of a termination fee to be negotiated by the parties in connection with the preparation of the merger agreement.

I LOVE that in regards to the 5.7million shares held by Lowrie - the VCG CEO who attempted the take-under - the deal is structured so he receives less per VCGH share that everyone else. Couldn't happen to a bigger jerk. That said, the deal involves buying out other nonsense subsidiaries of his, and even awards him a "consulting contract."

Contemporaneously with the merger, Rick's will acquire 5,770,197 shares of VCG Holding common stock held by Troy Lowrie and his affiliates, for cash in an amount equal to the lesser of $2.44 per share or the per share price of common stock received by VCG Holding's shareholders in the proposed merger. Mr. Lowrie may elect to receive shares of Rick's common stock at the same exchange rate received by VCG Holding's shareholders, for up to 30% of his VCG Holding common stock. In addition, in exchange for additional payments to be made to Mr. Lowrie as detailed in the letter of intent, Mr. Lowrie will refinance (at a lower interest rate) and continue to carry a $5.7 million note from VCG Holding (as acquired by Rick's), continue to personally guarantee certain VCG Holding's obligations in exchange for a fair market value cash payment for such guarantees, sell to Rick's the outstanding capital stock of Club Licensing, Inc., a subsidiary of Lowrie Management, LLLP, sell to Rick's the trademarks "Diamond Cabaret" and "PT's," and enter into a three-year consulting agreement with Rick's.
Copyright 2010 AlphaNinja

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