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Golden Nugget Online Could Jump When Its Merger Closes with Landcadia

Mark R. Hake
·4 min read

Landcadia Holdings II (NASDAQ:LCA) now expects to close its merger with Golden Nugget Online Gaming by the end of November. This news will be a catalyst for LCA stock, which will start trading under the symbol “GNOG” after the merger is completed.

Image of a laptop surrounded by gambling paraphernalia.
Image of a laptop surrounded by gambling paraphernalia.

Source: Stokkete/ShutterStock.com

This new timeline was announced by Landcadia and Golden Nugget on Nov. 5 in an SEC filing. In the filing, the company also said it had won two online-gaming industry awards

Moreover, Golden Nugget Online Gaming said that its gross gaming revenue had jumped 72% in the first nine months of 2020. And it said that it had taken in over $2 billion of bets.

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The Outlook for Golden Nugget Online Gaming

If Golden Nugget continues to post those kinds of results, LCA stock is going to be a huge success once its merger closes, as it will receive additional funds through the deal. The firm will become only the second, pure publicly traded online casino company in the U.S. DraftKings (NASDAQ:DKNG) is the other.

And when the merger was announced on June 29, Landcadia had $321 million of funds that will be transferred to Golden Nugget after the merge. Golden Nugget will likely be able to use those funds to pay down some of its debt. In addition, it will launch online gaming in other states, starting with Michigan.

Moreover, the company recently reported that its online net revenue had jumped 92% year-over-year and 4% versus Q2 to $25.9 million.

Further, its operating income jumped 92% YOY to $8.2 million. However, its Q3 operating income fell by $300,000 versus Q2.

The Outlook of LCA Stock

As I suggested in my last article, Golden Nugget will likely do quite well after its merger closes at the end of November.

DraftKings’ stock doubled from the time when its merger with a SPAC was announced until it closed. However, as I pointed out in my Sept. article, Golden Nugget Online has been much more profitable than DraftKings.

I also reported last month that Golden Nugget Online had disclosed an interesting issue that may have delayed the closing of the merger. Specifically, there were some last-minute negotiations between Landcadia and Golden Nugget’s owner, Tilman J. Fertitta, who will be the controlling shareholder of the merged company.

An amendment was made to the purchase agreement to limit Fertitta’s control over the combined company. That restriction would be implemented only if he and the entities he controls end up having less than a 30% stake in the company.

This change is good for shareholders because it protects them from a scenario in which Fertitta reduces his stake and yet can still control the board.

It also indicates that Landcadia believes that LCA stock could shoot up after the merger, making selling his stock attractive. They foresaw this scenario developing with a bad outcome. In effect, this is a bullish sign for the stock.

What To Do With LCA Stock

So far there are no forecasts for LCA stock, nor GNOG since it is not trading under that symbol yet. So, I would suspect that on Nov. 30 or shortly thereafter some sell-side analysts will produce their forecasts.

As I have above, however, I suspect that the stock will continue to do quite well. One way to take advantage of this is to buy the in-the-money warrants for LCA stock. Those trade under the symbol LCAHW (with NASDAQ). They are currently trading around $3.96 per warrant.

I wrote an extensive gallery article which explains how in-the-money warrants work for SPAC stocks. The exercise price is $11.50 per warrant. Therefore, when LCA stock trades at $13.60, they are in-the-money (i.e., the intrinsic value) by $2.10 (i.e., $13.60 minus $11.50). The extra $1.86 per warrant that is above the intrinsic value is what you pay to own the warrant over the 5-year exercise period.

However, there is a problem, as described in my article. Any warrant for an underlying SPAC merger stock which trades above $18 will likely get called by the company. The company could subsequently buy back the warrant for 1 cent.

The bottom line is that it is usually better to buy these in-the-money warrants prior to the merger closing. This is because the extra amount you pay over the intrinsic value will evaporate if and when the stock rises after the merger closes.

The bottom line is that I suspect that this stock will do extremely well over the next year.

On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.

Mark Hake runs the Total Yield Value Guide which you can review here.

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