Savvy Trades and Investments

[zenvesting]

FCCG: Fatburger owner, Fat Brands, Inc. (NASDAQ: FAT) is "going public" by offering 20% of the company through a Regulation A offering Friday (tomorrow), but what's interesting is by all apparent information in FAT's 1-A filings, the other 80% will continue to be owned by Fog Cutter Capital Group, Inc. (FCCG), a dark OTC company that looks deeply undervalued according to this valuation.

FAT's offering 2 million shares at $12, which gives the whole company a valuation of $120 million, which would imply the other 80% FCCG own is worth $96 million. According to OTC Markets.com FCCG has 11.8 million O/S (as of October 10th), which at the current price of $2.50 gives FCCG a valuation of $26.5 million.

It appears quite clear in their 1-A filings that FCCG is the owner making the offering and will own 80%:
https://www.sec.gov/cgi-bin/browse-edgar?company=fat+brands&owner=exclude&action=getcompany

<img>//www.sec.gov/Archives/edgar/data/1705012/000149315217011171/pg44_005.jpg</img>


Brief Background
In brief, Fatburger had filed for Chapter 11 bankruptcy in 2009 and sold all of its company owned stores to exit bankruptcy, the newly emerging FAT Brands is a 100% franchising company that now also owns the Buffalo Cafe brand. The company's franchises now consist of 176 locations around the world, but mostly in the western U.S., with Fatburger location accounting for 157 of the locations and Buffalo's Cafe and Buffalo's Express accounting for the other 19 locations.

The 1A filings also show marked improvement in financial performance and lay out a clear plan for growing their franchise model going forward, here's some of the more interesting excerpts:

-Since converting to a franchisor model in 2011, we have improved store-level operations and maintained positive same-store sales growth in our traditional domestic market over each of the last five years while operating less than 1% of total units. Over the same time period, our concepts have also experienced significant growth in total number of locations. As a result, between 2012 and 2016 the company achieved compound annual growth rates in net revenue, net income, and EBITDA of 9.9%, 40.0% and 35.3%, respectively, reflecting consistent yearly growth over this period.

-From 2012 to 2016, our EBITDA margin expanded from 27.2% to 64.3%.

-Based on existing new restaurant commitments of over 300 locations across our brands, we anticipate that our current franchisees will open more than 30 new restaurants annually for at least the next four years.

-In addition to our pending acquisition of Ponderosa and Bonanza, as of the date of this Offering Circular we have entered into a letter of intent to acquire an additional restaurant concept with approximately 60 franchised stores for approximately $11,000,000, and are in discussions to acquire another restaurant concept with approximately 50 stores for a purchase price in the range of $26-30 million.

The IPO proceeds are going to be used to settle some of FCCG's related party debt:

-As part of the Reorganization Transactions, we will issue to FCCG an unsecured promissory note with a principal balance of $30,000,000, bearing interest at a rate of 10.0% per annum, and maturing in five years (the “Related Party Debt”). We will use up to $9,500,000 from this Offering to repay a portion of the Related Party Debt to FCCG, which will use this payment to repay indebtedness that it previously incurred in acquiring Buffalo’s Franchise Concepts, Inc.


FAT intends to pay a 4% dividend:

-We intend to distribute as dividends to holders of our Common Stock, on a quarterly basis, substantially all of our distributable earnings.

-Our targeted quarterly dividend will be 4.0% of the price per share in this Offering, or $0.48 per share annually ($0.12 per share quarterly), which amount may be raised or lowered in the future without advance notice. We believe, based on our historical financial performance on a pro forma basis (assuming the completion of the Ponderosa Acquisition) and our expected future financial performance, that we will generate sufficient net income and cash flow to support our targeted quarterly dividend. See “Unaudited Pro Forma Condensed Consolidated Statement of Operations For the Year Ended December 25, 2016.



Valuation
Based on disclosures in the 1A, FAT revenues for 2017 are tracking at $7.0 million, with net income and EPS tracking at $3.0 million and $0.28, respectively. That being said, $12 may be a bit of a rich valuation for these earnings, as it would imply a forward P/E of about 43, but the expected 4% dividend yield may be enough to justify that for some.


What is not so obvious is the condition of FCCG’s balance sheet since going dark in 2009. As of Q3 2009 (the last FCCG financial filing), FCCG’s debt totaled $19.0 million.

- $8.8 million in notes payable and other debt of Fatburger, secured by the assets of Fatburger;
- $1.6 million in capital leases maturing on or before 2010 which are secured by an aircraft and various restaurant assets;
- $7.5 million of notes payable secured by various assets of the Company; and
- $1.1 million of short-term borrowings secured by the assets of DAC International.

FCCG has been financing acquisitions for Fat Brands. Fat Brands’ SEC filings mentions that Fat Brands owes FCCG $30 million in related party debt. Other than this $30 million, there does not seem to be any significant debt on FAT’s balance sheet. This is a possible sign that the $8.8 million of legacy Fat Burger debt on FCCG’s balance sheet no longer exists and that FCCG may not have any other significant debt. In addition to FAT using IPO proceeds to pay off a portion of its FCCG related debt, it intends to pay its remaining obligations ($20.5M) owed to FCCG by obtaining a line of credit:

Concurrently with or shortly following the closing of this Offering, we expect to enter into a credit facility with a third-party lender, providing for debt financing of between $35,000,000 and $50,000,000. Upon consummation of such credit facility, we intend to repay the remaining Related Party Debt, which is expected to total approximately $20,500,000.


This means that FCCG’s balance sheet could be much improved:

- Our director and Chief Executive Officer, Andrew Wiederhorn, is also Chairman and Chief Executive Officer of FCCG. The stockholders of FCCG, including Mr. Wiederhorn, will indirectly benefit from the proceeds of this Offering.

The real question is whether FCCG will transfer the economic benefit it receives from FAT to FCCG shareholders. The FCCG claim on FAT is real, but we just don’t know what CEO Wiederhorn’s view towards maximizing FCCG shareholder value will be. We are going to find out soon. In the meantime, I think once more investors connect the dots, FCCG could trade in line with its implied valuation in relation to FAT, with a reasonable discount. Further upside would exist if FAT executes on its growth plan, pushing shares higher and/or if FCCG distributes capital to shareholders.



Other Risks and Caveats

- CEO of FCCG/FAT, Andrew Wiederhorn, has had his share of legal problemsIn 2004 Wiederhorn had pled guilty to the two felony charges, one for filing a false tax return and the other for paying an illegal gratuity to Capital Consultants—which lost some $350 million in union pension money to fraudulent and failed investments, although he never admitted to wrongdoing in the matter. Wiederhorn maintained that it was wrong for the government to prosecute him for a non-intent crime involving a business transaction by his former employer, Wilshire Financial Services Group, Inc. He insisted it was a transaction which had been approved by Wilshire’s in-house counsel and other attorneys.

- The parent company of Ponderosa and Bonanza went through chapter 11 proceedings in 2008.

- Andrew overpromised and under delivered regarding Fat Burger prior to its chapter 11.

- Industry saturationWe don’t have 100% clarity on FCCG’s capital structure and financials.

- Growth in 2017 has stalled.

- Why take FAT public through Reg A as opposed to using FCCG to grow the brand (reverse split and up list), showing a clear commitment to maximizing FCCG shareholders?

- Given the CEO’s past history, the Chapter 11 theme and potential questions about the going public process, I can almost guarantee shorts will be hovering around FAT and FCCG.

DISCLOSURE: GEOInvesting.com informed its subscribers of this situation in early September at much lower prices, much of the information presented above is copied or paraphrased with permission from Maj Soueidan of GEOInvesting.com.