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Fertitta ’blank check’ flop is test for disgruntled investors - Chron

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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 blank-check 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 blank-check 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 low-hanging fruit may have already been picked and will the next layer be ready to be a public company?”

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Fertitta ’blank check’ flop is test for disgruntled investors - Chron
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