FAST II (NYSE:FZT) has entered into a definitive agreement to combine with entertainment company Falcon’s Beyond at an enterprise value of $1 billion, or 6.7x its 2024E EBITDA.

Orlando, Florida-based Falcon’s Beyond is an experiential entertainment developer focused on themed resorts and attractions using both proprietary and partnered intellectual property (IP).

The combined company is expected to trade on the Nasdaq under the symbol “FBYD” once the deal is completed in the second half of 2022 or first quarter of 2023.

Transaction Overview

FAST II brings a $222 million trust into the deal alongside a $60 million private placement by existing Falcon’s Beyond investor Kathmandu Collections. Of this, $20 million has already been pre-funded and deployed to develop the company’s Punta Cana resort. The remaining $40 million is expected to be disbursed in one or more tranches before the deal closes.

Falcon’s Beyond expects to add $237 million to its balance sheet through the deal after paying $45 million in transaction expenses. Should the deal be terminated, Falcon’s Beyond must pay FAST II a breakup fee of $12.5 million if redemptions are less than 90% or unknown and $6.5 million if redemptions top 90%.

Assuming no redemptions, existing Falcon’s Beyond shareholders are expected to own 86.2% of the combined entity, 5.8% of which is to be made up by the private placement investment. FAST II shareholders are to take a 10.7% stake while the sponsor’s promote shares are to convert to a 3% stake.

Falcon’s Beyond shareholders stand to earn up to 40,000,000 additional shares via an earnout. Of these 15,000,000 are at each share price target of $20 then $25 for 20 of 30 consecutive trading days and an additional 10,000,000 are to be dispersed at $30. FAST II’s sponsor also stands to receive an undisclosed amount of shares at a $15 price target under the same terms.

But, FAST II’s sponsor has agreed to create a bonus pool out of 20% of its 5,558,422 promote shares, which will be distributed pro rata to non-redeeming shareholders and private placement investors. In the case of no redemptions, this would effectively reduce the cost basis of each public share held to $9.39 or $9.20 in the case of redemptions at 50% – the price at which it is capped.

Half of unredeemed public shares will also be converted into convertible preferred equity that will pay an 8% dividend and have an $11 conversion price that will mandatorily convert if shares trade at or above $14.30 for 20 of 30 trading days. The combined company may opt for payment-in-kind for the dividend in the first two years.

Quick Takes: SPACs have unveiled a number of new instruments since the start of the year designed to reduce redemptions. Bonus pools have become more common and FAST II has added the new wrinkle of giving non-redeemers longer-term benefits in the form of dividend-paying senior shares.

One can’t yet say whether these moves will have their intended effect as none of the deals featuring a bonus pool have yet reached a closing. The closest equivalent was Lionheart II’s massive $32.4 billion deal with medical billing claims firm MSP Recovery, which offered 1.029 billion warrants to non-redeeming shareholders when it announced. It later converted this into a one-time dividend payable after deal’s close in May.

But, Lionheart II was still hit with above average redemptions with 89.9% of shares redeemed though a post-announcement extension vote followed by the completion vote and the combined company now trades at about $1.63.

FAST II’s structures are quite a bit different than Lionheart II’s, and they do provide for more incentive to stay longer beyond the votes, but uncertainty remains as how they and the similar instruments on deals announced in the first half of the year will fare. Because, ultimately, if investors don’t like the deal or just think it will trade down, 8% here or a few extra shares there may not be enough to hold them.

In all cases, the tontine bonuses introduce a bit of game theory between investors and also generates some question about the underlying valuation of the company if so much extra share capital is to be expended as a medium-term investor incentive. The risk factors in the parties’ presentation also note that “There is no guarantee that non-redeeming public shareholders receiving the preferred stock will be in a better future economic position”, which is ultimately the rub.

But, for investors excited about experiential entertainment, Falcon’s Beyond certainly has some interesting projects cooking. Falcon’s Beyond has long operated as a designer tasked with developing master plans for resorts and digital media experiences and it is now looking to own and operate its own network of attractions.

Its past portfolio includes about $100 billion-worth of sites over 20 years on a work-for-hire basis that has seen 58% of first-time clients come back to them for bigger jobs that followed. Now, through a 50-50 joint venture with Melia Hotels International, the company expects to operate four destination resorts with about 1,900 hotel rooms by the end of 2024. That joint venture already launched a theme park in Mallorca, Spain in 2007 that averaged about 240,000 visitors per year before the pandemic.

Of these locations, three are to be co-owned with Melia, but its Falcon’s Central retail, dining and entertainment venue is to be fully owned by Falcon’s Beyond.

The company did not share full financials and projections, but it did include the expected return on the three reports set to be operated via the Melia JV in Punta Cana, Tenerife and Playa del Carmen. These are expected to generate $305 million in revenue per year and $147 million in EBITDA. About 45% of the deal’s total proceeds are expected to go towards capex for its owned Falcon’s Central destination, however.

Given the lingering uncertainty around travel, the fact that these locations are not expected to be fully operational until 2024 may actually be a positive for investors in this case. However, this is harder to judge without any financials on the other planning and intellectual property sides of Falcon’s Beyond’s business, which it will be leaning on for revenue until then.

FAST II valued the company roughly in line with its peers at 2.2x 2024E revenue and 6.7x 2024E EBITDA. Six Flags (NYSE:SIX), SeaWorld (NYSE:SEAS) and Cedar Fair (NYSE:FUN) currently trade at a median multiple of 6.7x and this is highly depressed from late last year. SeaWorld is down about -36% on the year while Six Flags is down -51%, and Cedar Fair is down -17.5%.

As such, this could present a buy-low opportunity for investors, although Falcon’s Beyond should not necessarily be viewed as being immune from the uncertainty and recession fears driving down its peers.

Click here for the full investor presentation.

ADVISORS

• Guggenheim Securities, LLC is serving as financial advisor to Falcon’s Beyond.
• Jefferies LLC is serving as lead financial advisor and capital markets advisor to FAST II.
• White & Case LLP is serving as legal advisor to Falcon’s Beyond.
• Gibson, Dunn & Crutcher LLP is serving as legal advisor to FAST II.
• Paul Hastings LLP is serving as legal advisor to Jefferies.