Houston Chronicle

Fertitta’s “blank check” flop is a test for disgruntle­d investors.

- By Edvard Pettersson and Crystal Tse

Waitr Inc. never had the resources of rivals Grubhub Inc. and UberEats. Yet in November 2018 the online food ordering and delivery business went public through a merger with blankcheck firm Landcadia Holdings Inc., backed by Tilman Fertitta and Richard Handler, chief executive of Jefferies Financial Group Inc.

Landcadia, the first of three special purpose acquisitio­n companies formed by the pair, thought it found a promising startup in Waitr.

But Waitr turned out to be a disappoint­ment. Its shares plummeted as it lost about 96 percent of its market value in 2019, down from a high of almost $1 billion. That triggered a class-action lawsuit claiming that Fertitta and Handler misled shareholde­rs about the risks of Waitr’s business plan but pushed ahead with announcing their merger two weeks before Landcadia had to return investor money.

Now, in what could soon be the first ruling of its kind since last year’s record number of SPACs went public, a federal judge is weighing to what extent sponsors of these ventures can be held liable for failing to deliver. A hearing is set for March 16 and a ruling could come shortly afterward. Landcadia, Waitr, Fertitta and Handler deny wrongdoing and are urging the judge to dismiss the case.

If the case is allowed to go forward, that could encourage other disgruntle­d SPAC investors to seek redress in the courts. In 2020, 248 SPACs went public on U.S. exchanges, raising more than $83 billion. This year is on pace to set a new record, with 143 SPACs raising more than $44 billion in IPOs as of Feb. 12.

Since the start of 2019, 13 SPAC-related shareholde­r lawsuits have been filed, according to the Stanford Law School Securities Class Action Clearingho­use. With so many blankcheck companies scouting for suitable acquisitio­n targets, legal experts say the odds are there will be some duds and, inevitably, more litigation.

Big-name SPAC sponsors with deep pockets, like Fertitta and Handler, are especially attractive targets.

Fertitta, Handler and the other defendants have asked the judge to throw out the case because, they say, there’s no proof they weren’t sincere about what they told investors.

They “believed what they said about Waitr’s prospects, used their best efforts to achieve success, and accurately disclosed material facts regarding the specifics of the company’s financial performanc­e,” their lawyers said in a court filing. “But their business efforts simply fell short in the face of serious competitio­n.”

The plaintiffs say it should have been clear to Fertitta and Handler that Waitr was a bad bet for a merger and wouldn’t thrive as a food-delivery company aimed at small restaurant­s in under-served markets. As they see it, the problems ranged from Waitr’s management, to its location, to its business model. Representa­tives of Fertitta, Handler and Waitr didn’t respond to requests for comment.

The company had problems from the start, shareholde­rs claim. Its location in Lake Charles, La., was an obstacle to growth, making it difficult to recruit top-notch programmer­s and engineers, the shareholde­rs allege. As a result, in 2019, after it had merged with Landcadia, Waitr outsourced its back-end technology and essentiall­y became “a website that employed delivery drivers,” they allege.

Yet, when Fertitta told investors in 2018 about the planned $308 million merger with Waitr, he described it as having “a huge potential and a tremendous complement­ary relationsh­ip with my existing businesses.”

The big advantage Waitr touted was that it charged restaurant­s only 15 percent on the orders it handled, as opposed to the 20 percent and more other food apps charge. That take rate was unsustaina­ble and after it had become a public company, Waitr increased it to as high as 30 percent, plus an extra 3 percent credit card processing fee, according to the complaint.

Despite the many risks, the shareholde­rs claim, Fertitta and Handler had an incentive to go ahead with the reverse merger with their SPAC in 2018: they were facing a looming deadline. Like most blank-check companies, Landcadia had a two-year time frame to make an acquisitio­n or return investor money. Sponsors sometimes have as much as a 20 percent stake in a SPAC, giving them a windfall if they complete a deal — or nothing if they don’t.

Waitr’s shares collapsed after a series of disclosure­s in 2019. A unilateral increase in transactio­n fees prompted a lawsuit by a group of restaurant­s for breach of contract; the company gave up on developing its proprietar­y technology platform; and its chief executive officer, Chris Meaux, was replaced as quarterly net losses tripled from a year earlier, according to the complaint.

By December 2019, Waitr’s market cap had dropped to $35 million from $910 million in mid-March.

As for the explosion in SPAC activity in 2020, the two-year timetable means a correspond­ing surge in shareholde­r complaints — and lawsuits — may lurk down the road.

“Are there really that many worthy private companies that aren’t already on their own IPO track,” said Kevin LaCroix, an attorney at RT ProExec who blogs frequently about shareholde­r litigation. “The lowhanging fruit may have already been picked and will the next layer be ready to be a public company?”

Heeding the call of California Gov. Gavin Newsom, a state senator introduced legislatio­n Wednesday that would ban all fracking in the nation’s most populated state by 2027 and halt the oil and gas extraction method around schools and homes by Jan. 1.

Hydraulic fracturing, or fracking, is a technique used to extract huge amounts of oil and gas from shale rock deep undergroun­d. It involves injecting high-pressure mixtures of water, sand or gravel and chemicals into rock. Environmen­tal groups says the chemicals threaten water supplies and

public health.

The bill will likely be one of the most contentiou­s fights in the state Legislatur­e this year. The state’s influentia­l oil and gas industry generated $152.3 billion in economic output in 2017, which generated about $21.5 billion in state and local taxes.

But California has been a leader in combating climate change, with a law in place requiring the state use 100 percent renewable energy by 2045.

In 2019, Newsom halted new fracking permits and fired the state’s top oil and gas regulator after a report showed a 35 percent increase in new wells. That moratorium ended last April after an independen­t, scientific review of California’s permitting process.

The Democratic governor in September called on lawmakers to ban fracking by 2024 as he ordered regulators to begin preparatio­ns to prohibit the sale of all new gasoline-powered passenger vehicles by 2035.

State Sen. Scott Wiener, a Democrat from San Francisco, answered that call Wednesday. He introduced SB 467, which would halt new fracking permits or renewing current ones on Jan. 1, 2022. The measure would ban all fracking by Jan. 1, 2027, along with three other oil extraction methods: acid well stimulatio­n treatments, cyclic steaming and water and steam flooding.

“Climate change is not a theoretica­l future threat — it’s an existentia­l threat to our community and is having devastatin­g impacts right now,” Wiener said. “We have no time to waste, and California must lead on climate action, including transition­ing to a 100 percent clean energy economy.”

In addition, the bill would ban new oil and gas production within 2,500 feet of any home, school, health care facility or long-term care institutio­n — such as dormitorie­s or prisons — by Jan. 1, 2022.

The California Geologic Energy Management Division has been preparing new regulation­s that could have imposed similar requiremen­ts but announced in December that it had delayed the process until the spring.

Oil fell below $59 a barrel as wells slowly restarted in Texas and the White House said it would be willing to meet with Iran, which could potentiall­y lead to more crude exports from the Persian Gulf nation.

Futures in New York dropped almost 3 percent in Asian trading and have now given up most of the gains made during the U.S. cold snap. Marathon Oil, Devon Energy and Verdun Oil are using restored power from grids or generators to resume output that was halted by the frigid weather, according to people familiar. The timeline for a full restoratio­n of the estimated 40 percent or so of U.S. oil production that was shut in by the big freeze is unclear.

Demand from refineries is expected to stay depressed, however, as they also take time to reopen. Four of the biggest plants in Texas face delays of several weeks or more to resume operations, people familiar said, raising the potential for prolonged fuel shortages that could spread across the U.S.

Some investors may be taking profits following the recent surge in crude, with a 7.26 million barrel drop in American crude inventorie­s, around three times as much as forecast, failing to revive prices.

The White House, meanwhile, said it would be willing to meet with Tehran to discuss a “diplomatic way forward” in efforts to return to the nuclear deal that the U.S. quit in 2018.

Oil is still up more than 20 percent this year due to Saudi Arabian output cuts and an improving demand outlook. Technical indicators had been showing that crude was due for a pullback, with 14-day Relative Strength Indexes for both the U.S. and global oil benchmarks above 70 in a sign the commodity is overbought.

“The market was ripe for a correction and signs of the power and overall energy situation starting to normalize in Texas provided the necessary trigger,” said Vandana Hari, founder of Vanda Insights in Singapore. “There might be a bit of a knee-jerk bearishnes­s” from the U.S. announceme­nt on Iran, but American sanctions aren’t likely to be lifted anytime soon, she said.

The U.S. cold snap and power cuts affected more than 20 refineries in Texas, Louisiana and Oklahoma. Crude-processing capacity fell by about 5.5 million barrels a day, said Amrita Sen, chief oil analyst for Energy Aspects.

The fallout is already altering global energy flows, with traders snapping up tankers to haul European diesel to the U.S. It’s creating arbitrage opportunit­ies for refiners around the world to export oil products to the U.S., according to industry consultant FGE. South Korea’s biggest crude processor, SK Innovation Co., said it should boost its profit margins.

The cold blast has pushed WTI’s prompt timespread into a bearish contango structure due to the weak demand from refineries. The similar spread for Brent is firmly in a bullish backwardat­ion pattern amid the tightening global supply. The global benchmark’s April contract is 74 cents a barrel more expensive than the May one, compared with a gap of 29 cents at the start of last week.

“The focus is now turning to shrinking demand from the U.S. frigid weather,” said Kim Kwangrae, a commoditie­s analyst at Samsung Futures Inc. in Seoul. Recent price gains and the improving longer-term demand outlook could tempt OPEC+ producers to pump more, which might weaken prices, he said.

 ?? Kim Brent / Staff file photo ?? Donny Avery makes his way into Chick-fil-A to pick up a customer order for Waitr in the Beaumont area.
Kim Brent / Staff file photo Donny Avery makes his way into Chick-fil-A to pick up a customer order for Waitr in the Beaumont area.
 ?? Jae C. Hong / Associated Press ?? Last year, California Gov. Gavin Newsom called on the state Legislatur­e to ban fracking by 2024.
Jae C. Hong / Associated Press Last year, California Gov. Gavin Newsom called on the state Legislatur­e to ban fracking by 2024.
 ??  ?? Wiener
Wiener
 ?? Matthew Busch / Bloomberg ?? Oil drilling rigs in the Permian Basin that sat idle in snow are beginning to slowly restart production.
Matthew Busch / Bloomberg Oil drilling rigs in the Permian Basin that sat idle in snow are beginning to slowly restart production.

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